The 3 traps insidethe Warner Bros deal

The breakdown

Can Skydance outrun its debt?

The library is world-class. The question is whether $6 billion of cost cuts and growing streaming profit can outrun the decay of cable television while the company carries about $80 billion of net debt.

1. The debt arrives before the savings do.

   The closing added $56.9 billion of permanent debt with coupons up to 9.125%. Our research puts the annual interest bill at roughly $5.5 to $6.5 billion, which has to be paid every year while the synergies are still being found.

   Watch this part 3:45Sources 16

2. Trap 1: cable TV is leaking cash.

   The traditional networks still produce the cash that services the debt, and that business shrinks every year as viewers cut the cord.

   Watch this part 5:07Sources 4

3. Trap 2: a movie quota with a penalty.

   The consent decree commits the company to 30 films a year (32 from year three), at least 20 of them wide releases. Each missed film costs $30 million, and a forced sale of Miramax is possible.

   Watch this part 5:53Sources 3

4. Trap 3: the $12 dilution line.

   A $47 billion PIPE at $12 a share plus up to 471.3 million warrants exercisable at $12 means new shares arrive just as the stock recovers. Note: $12 is an exercise and PIPE price, not a hard cap on the stock.

   Watch this part 6:46Sources 71

5. The bull case is real, too.

   Harry Potter, DC, HBO and the Paramount library, $6 billion of targeted cost synergies and a projected $10 billion of free cash flow by 2030. Those are management targets, not results.

   Watch this part 7:56Sources 26

6. You ride in the passenger seat.

   Class B shares carry no votes. Whatever happens next, David Ellison decides it.

   Watch this part 9:58Sources 5