Why Paramount Skydance Rallied Over 20% Today

Shares of CBS and Paramount Studios owner Paramount Skydance (NASDAQ: PSKY) rallied big-time today, with shares moving 24.2% higher even as the broader stock market indexes slumped as of 1:39 p.m. EDT.

Paramount Skydance had been in a months-long bidding war with Netflix (NASDAQ: NFLX) for the prize of acquiring HBO Max owner Warner Bros. Discovery (NASDAQ: WBD). Yesterday, Netflix announced it would not challenge Paramount's latest offer, and Warner Bros. officially declared Paramount's new bid "superior."

While Netflix shares rallied on the relief of not having to buy an expensive asset, Paramount's stock also rose following months of decline, after investors wondered how much it would have to pay up.

Paramount lands its must-have asset

Back in September, Paramount Skydance shareholders initially reacted positively to news that new CEO David Ellison was making private offers to Warner Bros., which would make Paramount Skydance-Warner Bros. a more formidable player in the streaming media wars dominated by media-oriented tech giants Netflix, Amazon (NASDAQ: AMZN), and Disney (NYSE: DIS).

Looking at the biggest media companies in the U.S., you can see why Warner Bros. was a necessity for Paramount amid the industry's consolidation. If Netflix had acquired Warner Bros, Paramount might have found itself on the path to irrelevance or scooped up by another giant at some point. Looking at the major players' enterprise values -- even without Amazon -- one can appreciate the necessity of Paramount and Warner Bros. Discovery teaming up:

PSKY Enterprise Value data by YCharts

However, after Netflix swooped in with a superior offer last Fall, investors began to worry about how much Paramount would have to bid for Warner Bros. Since its 52-week high on September 23, Paramount's stock had fallen about 50% before yesterday.

Paramount ultimately made a hostile takeover bid in December and kept adding sweeteners to the deal, including an equity commitment from his family's trust and personal guarantees from Ellison's father, Oracle (NYSE: ORCL) Chairman Larry Ellison.

In total, the final deal valued Warner Bros. Discovery at $31 per share, or between $77 billion and $78 billion, but at a higher $111 billion when factoring in Warner Bros.' debt. Paramount will also pay a "ticking fee" of $650 million per quarter, beginning in September 2026, until the deal receives regulatory approval.

That's pretty expensive, but one could argue Paramount's decline had already factored in paying the higher price due to Netflix's competition. With the uncertainty cleared up, Paramount's shares rallied hard.

Image source: Getty Images.

Now what will happen?

Even assuming the deal passes regulatory hurdles without issue, there will still be significant uncertainty for the combined entity going forward. The new company will likely reap some administrative synergies and more resources to invest in content, but will also have a mountain of debt.

Balancing content investment and de-levering will be a delicate dance, not to mention content choices. Some of CEO David Ellison's hiring choices have already proved controversial to some during his brief tenure as CEO, so it will be interesting to see how the new company's audience segment evolves.

Therefore, it remains to be seen as to whether Ellison will be able to fashion a true competitor to Netflix, Disney, and Amazon. But with the Warner Bros. Discovery acquisition seemingly a go, he and his team can now move on to next steps.

Billy Duberstein and/or his clients have positions in Amazon, Netflix, and Walt Disney. The Motley Fool has positions in and recommends Amazon, Netflix, Oracle, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.