Warner Bros and Paramount merger as it relates to Oracle stock
Paramount's stock price keeps slowly declining (closed at $9.60 today). Paramount's current market cap is $10.8 billion. The deal prices WBD at $110.9 billion total value, including debt. This implies $81 billion of equity, of which the Ellisons guaranteed about $45 billion, mostly with Oracle stock.
Oracle stock opened the year at $197.47/share, and closed today at $148.53/share today, down 23.8%. It is down over 40% of its high of $250.25 a share this year. Oracle made $22.4 bn in actual EBITDA and $33.5 bn in adjusted EBITDA, but their Capex spend ($55bn) is huge, and its free cash flow is -$23.7bin. ORCL is trading at about 17-18x adj. EBITDA. If ORCL gets any more headwind on their massive AI bet, and there are already headwinds, and that valuation drops to even 14x or 15x EBITDA, which would be a very reasonable valuation given the slow growth of most of its business and its already premium valuation, that would represent another 30% drop in its stock price since there is about $100 bn of debt (Enterprise Value = Debt + Equity Value). If the market stops buying the "adjusted" EBITDA number, then all bets are off on valuation.
At the current valuation, Ellison's stake in Oracle is worth about $160 billion. Even a 20% drop in the stock price would put the Ellison guaranty of the Paramount deal in jeopardy assuming that the margin loan is capped at less than 50% of his ORCL stock. Does that kill the deal? I don't know.
I do know that the merger purchase price for WBD stock is $31.00/share, but WBD closed today at $26.74. That is a big spread for a signed cash deal that is expected to close in 90 days or so. The market is pricing in about a 30% chance the deal will fail.