Skydance's Market Value Is Currently Less Than Half the Combined Value of Warner Bros and Paramount

David Ellison's newly founded Skydance faces a difficult start on Wall Street. After a year-long battle, he won Warner Bros. Discovery. However, investors at this stage appear to believe he overpaid for the deal, as the value of the newly merged company, Skydance Corp, has not reached $78 billion.

David Ellison's start-up Skydance is off to a rocky start on Wall Street.

After a year-long battle, he won the Warner Bros. probe. But investors at this point seem to believe he paid too much for the deal — which is worth the newly merged company, Skydance Corp. It has nowhere near the $78 billion in cash that Paramount paid for WBD.

As of Oct. 5, the last day of trading for WBD and Paramount Skydance ( PSKY ) on the Nasdaq, Warner Bros. Discovery had a market capitalization of $77.7 billion and Paramount about $11 billion. Today, Skydance's market value is less than $40 billion, less than half of the combined value of its predecessors. Popular in stories related to the variety "The Mummy 4" with Brendan Fraser and Rachel Weisz officially titled "The Mummy: Book of the Dead"

On Wednesday, Skydance shares fell 22 percent. This came after the company distributed about 471 million warrants, which gave holders of PSKY Class B shares of Paramount Sky Dance the right to buy shares of the new company at a price of $12 per share.

what happened After the market closed on Tuesday, the New York Stock Exchange made a technical correction to Skydance's share price, which lowered it 19.4 cents due to the issuance of the warrants (NYSE trades as "SKYD.WS"). Speculation is that index funds sold the warrants they held when trading began. That, in turn, was interpreted as a selling event by the automated trading systems, which drove down SKYD's stock price. Skydance issued a press release after the market closed on Wednesday, noting that the warrants represented only about 9 percent of the Class B common stock.

According to Skydance, the value implied by the warrant distribution gives Skydance a market value of $45.6 billion at $9.07 per share of Class B stock — and the warrants are worth about $1 billion at $2.20 each (for a total equity value of $46.6 billion). As the stock fell on Wednesday, the market capitalization was about $36 billion. Shares of Skydance rose slightly on Thursday, rising 2.8% to $7.26, giving the company a market value of $36.6 billion (excluding the value of the warrants, which closed at $2.96 on Thursday).

But beyond the disruption to the issuance of equity warrants, there is skepticism among analysts and credit rating agencies that Skydance will be able to hit the numbers they forecast. Ellison and his team must prove to Wall Street that they can achieve $6 billion in cost savings (annualized over the next three years) while continuing to invest in content — including more than 30 movies in theaters a year — and the rest of the business. All the while, Skydance must pay off its massive debt load. As it stands now, the company's dividend payout alone would be $6 billion a year.

Upon closing of the merger, Paramount paid WBD shareholders $31.01666668 per share in cash, for a total of approximately $78.billion. Under the terms of the deal, Paramount will also assume WBD's debt ($33.1 billion as of the end of June), bringing the combined company's net debt to nearly $80 billion.

Meanwhile, Skydance's Class B investors have no say in corporate governance matters. The Ellison family and RedBird Capital Partners are the sole holders of Skydance's Class A shares, giving them 100% voting control. (According to Skydance SEC filings, Class A shares have no intrinsic value, but each share has the option to convert into 1.5 Class B shares.)

Some market watchers see Skydance as an attractive investment opportunity after shares fell on Wednesday.

"There may be a buying opportunity in Skydance stock as the company's share count has not changed much since the warrant issuance" and "Skydance's outlook has not changed," Barron's associate editor Andrew Barry wrote in an Oct. 14 article. While the warrants are currently underwater at $12 per share, they are valued based on option pricing models "due to the long 10-year maturity and the potential for Skydance stock to appreciate in the coming years," Barry added.