WBD stock sits 0.28% below the expected payout with closing set for Oct. 6. Some of the roughly $52 billion of bonds financing the purchase slid in price Thursday, and Paramount's Class B shares lost about 8%.
Two markets looked at the same transaction on Thursday and reached different conclusions about its risk.
Warner Bros. Discovery shares changed hands near $30.93 in the afternoon. Holders expect to receive about $31.02 a share when Paramount Skydance completes its $81 billion purchase. The difference, roughly 9 cents or 0.28%, is all the compensation the stock market is demanding for anything going wrong in the five days before the scheduled Oct. 6 closing.
That narrow gap reflects the removal of the last legal obstacle. On Wednesday afternoon, the antitrust case brought by 12 states ended when a federal judge approved Paramount's settlement with them.
The bond market's view
The debt market was less relaxed. Paramount has finished selling about $52 billion of bonds to pay for the deal, roughly $30 billion of it high grade. Investors bought that high-grade slice at tighter pricing than first offered, and yields at sale ran as high as 9%. By Thursday, prices on some of the new bonds had dropped far enough that their yields topped 10%.
The 10-year Treasury touched about 5.34% the same morning. A bond yielding 10% therefore pays roughly 4.7 percentage points more than the 10-year Treasury.
What a falling bond does and does not change
Coupons are fixed when bonds are sold, so Thursday's slide does not raise the interest Paramount owes on this debt. It raises the price investors would demand for the next issue, including any refinancing. On a debt load of this size, every percentage point of borrowing cost is worth about $520 million a year.
The stock
Paramount's Class B shares fell about 8% to near $9.50, on more than 27 million shares. The decline coincided with the bond slide and the rise in Treasury yields, and the stock does not separate the two.
Holders of record on Oct. 5 are due one Class B warrant for each share, payable Oct. 13 and contingent on the merger closing. The warrants will not be listed.
Two readings
One reading is that Paramount has traded legal risk for financial risk. The deal is secure, but bonds trading above 10% signal that lenders see a heavily indebted combined company, and the equity is absorbing that view.
A second reading is that the bond moves reflect a week of heavy issuance into a falling Treasury market rather than a judgment on the company. Prices on new debt can settle once the initial distribution is done.
After Oct. 6
The closing removes the 9-cent spread. From there, the yield on the new bonds is the gauge to follow. If it eases back toward the 9% level set at pricing, Thursday was a supply event. If it stays above 10% once the combined company starts reporting, the market is pricing leverage.