Warner Bros. Discovery (WBD) CEO David Zaslav met with Paramount Global (PARA) CEO Bob Bakish to discuss a potential merger, according to Axios. Rumors of the deal prompted Wells Fargo analyst Steve Cahill to upgrade Paramount to equal weight, citing 'higher deal probability.'

Shares of both Paramount and Warner Bros. Discovery declined on Thursday.

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Video Transcript

SEANA SMITH: A Warner Brothers Discovery pulling back from earlier gains on the back of merger chatter with Paramount. Now, CEOs from both of the companies reportedly met over lunch to discuss a possible deal. That meeting first reported by Axios. But taking a look at the price action that we're seeing shortly after the open this morning.

You're looking at Warner Bros shares down another 4% today. Paramount also under pressure, off just about 1%. And Brad, I'm taking a look at some of the chatter amongst analysts here this morning. And Barclays' commentary sticking out to me just in terms of why we could be seeing some of this pressure.

They're putting out the fact that combining two of the most challenged assets across legacy media is unlikely to somehow transform the combination into a better company. They also went on to say that WBD already trades at a meaningful lower valuation than Paramount. And this gap will make it quite complicated to achieve a deal without significant dilution for WBD shareholders, a big reason why we're seeing more pressure on the stock today.

BRAD SMITH: Yeah. Our own Allie Canal had also written about Wells Fargo and Steve Cahill's note that was out, and looking at the propensity for a deal to actually come over the finish line here. Of course, they higher-- a higher deal probability, I should say rather, is how he was looking at this.

And ultimately saying that the M&A headlines changed their thesis around Paramount, given underlying asset potential here. Continuing on to say that they continue to believe that it might like to sell a controlling stake to a content operator that would protect the significance of Paramount Studios, i.e. willing buyers or a willing seller here. So all in.

Typically, if the company that is kind of making the acquisition is seen to be paying too much or taking on too much debt that the other company may have, then you typically see that moving lower here. In this case, it's a larger question of would, if this merger at the end of the day be entered into, what would that debt level be that's taken on at the end of the day?

And is that perhaps something that investors are trying to get ahead of as well here? Because both of these companies, the content industry right now, content is king, but cash is also King to produce that content, especially when you're going from 0 to 100 and a very finite period of time, coming off of the strikes that we've seen over the course of 2023. And a potential one for some of the set workers next year too.

SEANA SMITH: Yeah, certainly. And we've seen it pressure some of the other competitors within the space. Clearly a priority. And rightfully so to shareholders out there wanting to see proven returns and wanting to see maybe a bit of a scale back in some of these spending plans from these larger corporations, given the fact that many of these streamers are bleeding cash or in certain divisions within their company. It does seem, at least for right now, the Street a bit split just in terms of whether or not this potential deal would possibly encounter any sort of regulatory challenges.