Pressure from all sides could jeopardize the Paramount/Warner Bros. deal

After months of smooth sailing, Paramount’s $111 billion deal to merge with Warner Bros. Discovery is facing challenges from lawsuits at home and abroad. If that wasn’t enough, Oracle founder Larry Ellison — who took out margin loans using a huge portion of his personal fortune to back the deal — is facing financial pressure from unrelated market factors.

A number of stories have come together in recent days that paint a bleak picture for the Paramount/Warners deal, and while the odds still look fairly good that the deal will go through, it’s far from a sure thing at this point. That is, in part, because of the complexity of the deal itself.

Paramount’s parent company, Skydance, is still in debt from acquiring Paramount, which means they didn’t have the same kind of liquidity that Netflix did during the bidding war between the two industry titans. The difference between Netflix’s bid and Skydance/Paramount’s was more than made up for by Ellison, the father of Skydance boss David Ellison, offering up as much as $40.4 billion backed by Oracle stock.

Ellison is one of the world’s wealthiest men, but much of his net worth comes from Oracle stock; he owns 40% of the company, making him its largest shareholder, and when cash is tight, he uses that stock as collateral for margin loans. The money he offered for the Warner Bros. deal accounts for roughly 30% of Ellison’s Oracle stock holdings. It’s an aggressive move that immediately drew criticism.

Ellison has held onto his stocks for dear life, using them as collateral for loans rather than selling any in order to fund his lifestyle and other business ventures. The continued success of Oracle has helped make that a viable strategy, as Ellison uses Oracle profits to pay back to loans and clear the collateral. The Warner Bros. deal, though, is a risky endeavor; neither Paramount nor Warner Bros. have been hugely profitable companies in the recent past, and both are weighed down by a ton of existing debt. The prospect of making enough money to pay back the existing Paramount debt while taking on an additional $100 billion for Warner Bros. is daunting.

Meanwhile, there’s a “ticking clock” fee on the deal. As long as the deal remains incomplete, Warner Bros. shareholders are exposed to market volatility, so if the deal isn’t done by September, Paramount is on the hook for penalties of around $650 million per quarter, due to existing Warner Bros. shareholders.

That might be a difficult promise to deliver on when the massive, multinational companies are facing a number of lawsuits seeking to delay or halt the merger — including one led by the state of California and co-signed by the attorneys general of 11 other U.S. states. The U.K. government has also stepped in to block the merger, and Parliament is currently on summer break, meaning it will be a while before the issue is even fully taken up.

As author and Better Offline host Ed Zitron points out, S&P Global recently downgraded Oracle’s credit rating to BBB/A-2, one level above “junk” status, largely because of the hundreds of billions of dollars of investment it has locked up in OpenAI.

“If OpenAI were unable to pay Oracle, we believe Oracle could be left with massive data center leases that it might be unable to exit or have to re-lease to new tenants under less-favorable terms,” S&P wrote. That echoes remarks Oracle made to its own investors (per Bloomberg). In a recent financial report, Oracle warned that OpenAI may not be able to pay the $300 billion they owe Oracle over the next four years, and that if they cannot, Oracle “may be unable to re-lease, repurpose or assign such capacity on acceptable terms, if at all.”

OpenAI currently has optimistic revenue charts promising to make the kind of money that they would need to pay Oracle, but those plans are contingent on Oracle hitting its target dates for data center construction…and the company is behind. Zitron — one of the internet’s most vocal critics of the AI industry — reads this as a potential house of cards in which Oracle has invested so much into OpenAI that it could render the company insolvent if OpenAI doesn’t pay them back…but OpenAI cannot pay them back unless Oracle remains solvent and increases its spending and compute capacity.

Zitron is not saying that Oracle is doomed by any stretch of the imagination — but a few bad quarters from either OpenAI or Oracle or both could end up in Oracle’s credit rating taking another hit. At “junk” levels, it becomes much more expensive to borrow, which would add to the debt load as well as reducing the overall value of the stock. If Oracle’s stock goes down, Larry Ellison would have to pledge even more of his personal stock in order to meet the $40 billion needed to backstop the Paramount deal.

So, with the Sword of Damocles hanging over Ellison’s head, regulatory pushback in the U.S. and the U.K., and a massive debt load that’s on track to get significantly bigger in the coming weeks and months, what’s the outlook for the Paramount/Warner Bros. deal? It’s difficult to say.

The Trump Administration, flush with millions in campaign contributions from Ellison and his associates, did its best to clear the runway for the deal, which Skydance had hoped to close by the end of July. That date is more or less out the window now, but the Ellisons still hope to clear the regulatory hurdles and close the merger before the September 30 date that would start WB’s clock ticking. And all the while, Ellison — once the richest man in the world — has lost a massive chunk of his net worth as Oracle stock has dropped more than 50% since September.

If OpenAI doesn’t turn out to be the Amazon of the AI boom, and Oracle takes a hit on that investment, it could do serious damage to Ellison’s reputation. The OpenAI gamble paired with the Paramount fiasco already has some analysts skeptical of Ellison’s habit of backing his lifestyle with margin loans, given how substantial a share he has in the company. Whether either, or both, come back to bite him remains to be seen.