Warner Bros. Discovery (WBD) Stock Falls to 3-Month Low as Merger Faces Legal Scrutiny

TLDR

• WBD stock dropped to a 3-month low, closing at $26.24 on Friday, now offering a 17% return to the $31 deal price
• State attorneys general are preparing to challenge the Paramount/Warner Bros. merger over concerns about market power
• The EU has opened a review of the deal under its Foreign Subsidies Regulation, targeting Middle Eastern funding involvement
• A trio of Gulf funds — Saudi PIF, Qatar Investment Authority, and Abu Dhabi’s L’Imad — agreed to provide ~$24 billion in equity financing
• Paramount is targeting a Sept. 30 closing date and has offered concessions to state AGs to avoid a legal fight

Warner Bros. Discovery stock fell nearly 3% on Friday, closing at $26.24 — its lowest level in three months. As of Tuesday afternoon, it had recovered slightly to $26.72, still well below the agreed deal price of $31 per share in cash.

Warner Bros. Discovery, Inc., WBD

That gap — roughly 17% — is unusually wide for a merger arbitrage situation, particularly one with a target closing date before the end of Q3 2026.

Roy Behren, co-manager of the $2.5 billion Merger mutual fund, which holds WBD, called the stock “extremely attractive.” He’s penciling in an October close to be conservative and estimates an annualized return of over 30% from current levels.

Paramount has built in a financial incentive to close fast. If the deal doesn’t wrap up by Sept. 30, WBD stockholders get a 25-cent-per-share ticking fee — with additional quarterly payments until closing.

State AG Challenge Adds Pressure

Friday’s selloff was triggered by reports that state attorneys general are gearing up to challenge the merger. Their concern: Paramount would hold too much sway over the TV and movie landscape with Warner Bros. under its roof.

Hollywood unions have echoed those worries, with workers anxious about job losses from the combined entity.

Paramount appears to be moving quickly to defuse the situation. Bloomberg reported it has already handed a list of concessions to state AGs, including California’s Rob Bonta. The deal is not expected to face a federal antitrust challenge.

The U.K.’s competition authority is also reviewing the transaction.

EU Probe Into Middle Eastern Funding

On top of the domestic noise, the EU announced Wednesday it has opened a review of the deal under its Foreign Subsidies Regulation (FSR). The deadline for initial vetting is July 14.

The probe centers on the $24 billion in equity financing committed by three Gulf sovereign funds: Saudi Arabia’s Public Investment Fund, the Qatar Investment Authority, and Abu Dhabi’s L’Imad Holding Co.

The FSR is designed to stop state-backed capital from distorting competition in the EU. If regulators find issues, they could launch a full-scale investigation and demand remedies from Paramount.

This follows the EU’s recent track record on FSR cases — it recently opened a full probe into JD.com’s bid for Germany’s Ceconomy, and previously scrutinized Abu Dhabi National Oil Co.’s €11.7 billion takeover of Covestro, which was ultimately cleared.

The sheer size of the deal — an equity value close to $80 billion — has also contributed to the wide arbitrage spread. Arbitrage funds have limited capital, and a deal this large stretches the pool thin.

Meanwhile, Paramount’s own stock has been under pressure, trading around $10 and down 22% this year. It sits closer to its 52-week low of $8.60 than its $20-plus high, weighed down by concerns over leverage and the price paid to outbid Netflix.

The EU’s initial review deadline stands at July 14.

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