Skydance bought Warner Bros. Discovery. The deal closed on Oct. 6. Less than a month later, the stock market has given its answer. The shares are down 19%. The whole company now sells for about $40 billion. Its own books say one line, goodwill, is worth about $57 billion. Jonathan Weil of the Journal's Heard on the Street says one of those numbers has to be wrong.
Goodwill is a simple idea with a scary name. When a company buys another for more than its hard assets are worth, the extra goes on the books as goodwill. It is the bookkeeping mark for the extra a buyer paid. You can't sell it. It only holds up if the business later earns enough to justify the price. Skydance paid about $97 billion for Warner, cash and loan settlements included. It booked $55 billion of that as goodwill. Programming and content rights got $25 billion. Another $40 billion went to brands and relationships like HBO and TNT. The company already owned CBS and Paramount Pictures from David Ellison's takeover last year.
The debt is the part that counts
The deal left Skydance with about $87.5 billion of total debt, by a Fitch note from Oct. 5 that cut its credit rating. Fitch rates it two notches below investment grade, the line where lenders start to call a borrower risky. It puts debt at 7.8 times this year's EBITDA. EBITDA is a rough measure of cash profit before interest, taxes and paper charges. That works out to roughly $11 billion. Analysts expect about $5.9 billion of interest expense next year. That much debt means the lenders get paid first. Shareholders get whatever is left, if anything. Skydance says it will cut $6 billion of annual costs within three years. It targets debt of 3.0 times EBITDA by 2029 and more than $10 billion of free cash flow by 2030. Fitch thinks hitting that needs stock sales or asset sales.
There is a hopeful story going around too. Last year Warner itself traded below the value of its own goodwill. Then a bidding war with Netflix (NFLX) rescued its shareholders. Ellison won with money from his father, Oracle (ORCL) chairman Larry Ellison. Now John Malone has floated SpaceX as an investor, and reports say Elon Musk put $1 billion in. Weil's verdict on counting on that is blunt. A Musk rescue is "a lottery ticket, not a strategy." The first post-deal earnings report comes Nov. 9. That is when management has to show the cost cuts are real.
Our read
This is an Investments/Risk · IN04 story about reading a balance sheet. Skydance isn't in any of our model books. This is our stance on the stock, not a prediction. We don't buy a company whose equity is a thin cushion under $87.5 billion of debt, however famous its movies. We're not saying the books are wrong. Accounting lets goodwill sit until the cash flows fail it. The market just isn't waiting for that test. When the price and the books disagree this much, we trust the price people actually pay. A rumor about a rich rescuer doesn't change the math.
Here's the connection to your own money. Pull up the single biggest stock you own outside a fund. Open its balance sheet and find the word goodwill. If goodwill is most of the company's equity, you own a promise that past deals will pay off, not a pile of things it could sell. That's fine if you know it. It's a surprise if you don't. Five minutes with one line of one statement is cheap insurance. You check the roof before the rain, not during it. If you'd rather not read a balance sheet, that's one of the things we do in a review.