According to analysis from Arete Research, the management of Paramount Skydance Corp (PSKY.US) may lack the necessary experience to handle the massive debt load that would result from a merger with Warner Bros. Discovery (WBD.US). The parent company of CBS and other media assets announced its intention to acquire Warner Bros. for $110 billion in late February, with the deal expected to close in September despite regulatory hurdles.

Analyst Pierre-Marie d’Ornano noted in a report that upon completion, the combined media giant would carry a total debt burden of approximately $86 billion. In light of this, Arete downgraded its rating on Paramount's stock from "Neutral" to "Sell" and drastically reduced its price target to $2, representing the lowest forecast among all Wall Street analysts covering the stock. This target suggests a potential downside of roughly 79% from Thursday's closing price.

In its Thursday report, Arete explained that "large media mergers have historically been difficult." The firm described the Paramount-Warner deal as potentially "the most highly leveraged media merger on record" and stated that "it is unclear whether management has the ability to run such a highly leveraged balance sheet."

The $2 price target is 71% lower than the next-lowest target of $7 from Wells Fargo analyst Steven Cahall. In contrast, Benchmark Co. and Morgan Stanley are the only two firms with "Buy" ratings, with targets of $19 and $14, respectively. The average price target among 15 analysts is $11.40, implying a potential 12-month upside of about 22%.

Addressing the concerns, a Paramount spokesperson stated in an email, "The Paramount management team has a clear and disciplined plan for balance sheet management, and we are ahead of schedule. Our capital allocation priorities are consistent: invest for long-term growth, restore investment-grade credit metrics, and return excess cash to shareholders once those goals are achieved."

On Thursday, Paramount shares closed down 4.3% at $9.33, marking their fourth consecutive daily decline, with an intraday drop as steep as 9.3%. The stock has fallen more than 30% year-to-date.

Meanwhile, Matthew Halbower, CEO of Pentwater Capital Management, indicated in an email that his firm holds about $1.3 billion in Warner Bros. stock and roughly $40 million in Paramount shares. He argued that post-transaction, "several sophisticated institutional investors" would inject a total of $47 billion in equity capital into Paramount at $12 to $16 per share.

He added, "It is difficult for research analysts to argue that Paramount's stock is worth less than what this many institutional investors are willing to pay."

However, d’Ornano disagrees. He wrote in the report, "The track record of large media M&A is poor, with deals often under-delivering, hampered by secular declines in linear TV, over-optimistic streaming assumptions, and unwieldy capital structures." He believes this acquisition "faces similar challenges, but with higher debt costs and more restrictive maintenance covenants."

d’Ornano further stated, "In our view, a highly leveraged balance sheet requires a specific management mindset and skill set, which does not appear evident at Paramount." He noted such capabilities are more commonly found in companies associated with cable billionaire John Malone, whereas Paramount is currently led by David Ellison.

Although the U.S. Department of Justice concluded its antitrust review of the Hollywood mega-deal last month, hurdles remain. Attorneys general from several states are preparing legal challenges to pave the way for antitrust lawsuits, with Oregon's Attorney General calling for a 60-day delay in the closing date. Additionally, the UK government has also expressed concerns about the transaction.