Why a Warner Bros.-Paramount Does (and Doesn’t) Makes Sense

The wrinkles in a potential media merger

Media deal makers aren’t waiting until 2024 to get started on potential big-ticket M.&A.

News that David Zaslav, the C.E.O. of Warner Bros. Discovery, expressed interest in combining with Paramount set tongues wagging about a possible union of Hollywood’s top deal candidates. But it’s unclear whether this will be the combination that gets completed, DealBook’s Lauren Hirsch and Michael de la Merced write.

A deal could make sense. Their streaming platforms — Max and Paramount+ — are far smaller than Netflix or Disney+, so putting them together might create a more robust competitor. (Of note: Both companies own valuable sports streaming rights, which could help draw subscribers.)

And it could give the united business more leverage in negotiations with cable providers on the fees for carrying legacy television networks like Comedy Central and Discovery, especially as those channels suffer from falling ratings and stagnant ad sales.

But there are plenty of reasons not to do a deal. Warner Bros. Discovery has $40 billion in debt and $5 billion in free cash flow, while Paramount has negative cash flow and $15 billion in debt. In other words, the combined company would have a crushing debt load and little money to pay that down or spend on content — potentially forcing Zaslav to cut more costs, after previous efforts torched his standing with content creators.

The new business would also be heavily reliant on declining TV channels, a situation that investors don’t like. (Paramount, however, may be able to sell BET and VH1 to a buyer such as the media mogul Byron Allen.)

Investors aren’t enthusiastic about the potential combination: Warner Bros. Discovery shares fell almost 6 percent on Wednesday after Axios scooped the talks, while Paramount’s stock declined 2 percent.

There are other unknowns:

• Shari Redstone, who runs Paramount’s parent, may be up for a deal, given that she’s exploring selling a controlling stake in her company to Skydance, a studio backed by the investment firm RedBird Capital. But is the media mogul John Malone, who sits on the Warner Bros. Discovery board, also game?

• The Biden administration’s antitrust enforcers, who just finalized an aggressive overhaul of merger rules, is likely to be skeptical of such a combination.

• How far can talks go without running afoul of I.R.S. rules that would impose a big tax hit on Warner Bros. Discovery if it does a big deal before April?

Some observers think there’s a Kabuki element to these talks. CNBC’s Alex Sherman and The Information’s Martin Peers wonder whether Zaslav’s approach to Paramount, and its quick leak to the media, was a market trial balloon — or a way to draw out Comcast, whose NBCUniversal has long been considered a potential buyer of Warner Bros. Discovery. (NBCUniversal, with its deeper pockets, is financially a more attractive partner for Zaslav’s company, though it would also face antitrust concerns.)

Not all deal makers think that’s the case here. But with investors widely believing that the media industry must consolidate in some way, the only question is which deals get done.

HERE’S WHAT’S HAPPENING

Apple loses bid to delay a sales ban on its smartwatch. The International Trade Commission denied the company’s effort to pause the action while Apple appeals a ruling that it infringed a competitor’s patents. Apple said this week that it would stop selling the latest versions of its popular device in U.S. stores starting on Thursday. President Biden would have until Dec. 25 to veto the original decision.

The Biden administration may raise tariffs on Chinese electric vehicle makers. Officials are considering increasing the 25 percent levy (imposed by the Trump administration) to boost the U.S. clean energy sector, according to The Wall Street Journal. Meanwhile, China said on Thursday that it would halt the export of rare earth metals and magnets, crucial ingredients in the making of military hardware and EVs.

More companies warn of supply chain disruptions from Red Sea attacks. Ikea and Electrolux said delivery of products may be delayed, as Houthi rebels in Yemen vow to step up their attacks on ships. More than 100 container ships have been redirected to circumnavigate Africa, a detour that could add more than a week to journey times and push shipping rates higher.

An A.I. darling passes the hat, again

Anthropic, the highly touted artificial intelligence start-up, is in talks to raise $750 million from backers including Menlo Ventures at a valuation of at least $15 billion, according to The Information. It’s a sign of how much money it takes to compete in the A.I. wars — and how investors are (mostly) willing to keep paying.

Consider the eye-popping numbers of the potential investment: At $15 billion, excluding the potential new investment, Anthropic’s valuation would be triple what it was in a fund-raising round this spring. And, according to The Information, it would be 75 times the company’s annualized revenue — more than the 66 times multiple in OpenAI’s current share sale.

Anthropic has already raised five rounds this year, according to data from Crunchbase. The company has collected $7.6 billion from investors, including tech giants like Amazon and Google that are eager to hook Anthropic’s Claude A.I. model into their sprawling cloud computing platforms.

That huge sum is necessary, considering the extremely expensive costs of the computing power needed to develop A.I. systems. (That’s a reason much of Microsoft’s $10 billion investment in OpenAI is in cloud credits.)

It suggests that investors remain interested in A.I. leaders. Overall investment in generative A.I. start-ups declined in the third quarter, according to PitchBook, with some investors citing growing pains with the technology and some cooling of the fervor for chatbots. Anthropic is clearly an exception, as is Mistral, a French start-up that in its first seven months has raised more than $650 million and closed a new funding round this month.

Investors are still willing to back a business with unorthodox corporate governance. Oversight at Anthropic isn’t as overtly messy as OpenAI’s setup; it has a board that has a fiduciary responsibility to shareholders, for instance.

But the start-up, whose founders left OpenAI because of concerns about safety, has also created a so-called long-term benefit trust, made up of financially disinterested directors meant to ensure the company lives up to its mission of producing A.I. that benefits humanity.

The banking sector’s $160 billion conundrum

Since the collapse of Silicon Valley Bank last spring, Wall Street has been on high alert for the next big systemic risk. Atop its list of worries is the banking sector’s exposure to the souring commercial real estate market.

A new study puts a number on what’s at stake. Banks face up to $160 billion in losses from an anticipated wave of defaults on their commercial real estate loans, researchers from Columbia, Stanford, U.S.C., and Northwestern write in a working paper published by the National Bureau of Economic Research.

Separate research this week estimated that commercial real estate, or C.R.E., values are set to drop by more than $500 billion in 2024. And Morgan Stanley calculated earlier this year that lenders would need to negotiate more than $1.5 trillion of their C.R.E. portfolios by the end of 2025 to avert defaults.

The potential tsunami of losses could put banks at risk. “Our analysis, reflecting market conditions up to Q3 2023, reveal that C.R.E. risk can induce anywhere from dozens to over 300 mainly smaller regional banks joining the ranks of banks at risk of solvency runs,” the researchers wrote in the N.B.E.R. paper.

C.R.E. is the lifeblood of most banks’ lending businesses, a market estimated at roughly $20 trillion. The sector has grown more precarious because of a potentially toxic cocktail of post-pandemic office vacancies, the work-from-home trend, the highest interest rates in decades and a slowing economy.

Regulators are concerned, too. In its annual report