Skydance Shareholders Get Free Warrants Tuesday. Index Selling Could Hurt the Price.

Skydance was known as Paramount Skydance before its purchase of Warner Bros. Discovery last week. (Adam Gray/Getty Images))

Key Points

• Skydance will distribute about 470 million warrants to public shareholders, which are scheduled to begin trading Tuesday on the NYSE.
• S&P index funds are expected to dump the warrants because they will not be included in the S&P 500, which could pressure the warrant price.
• Skydance’s stock has been depressed as investors take a cautious approach to the company.

Skydance investors will receive a nice bonus this week when the company distributes about 470 million warrants to public shareholders that could be worth a significant percentage of the currently depressed stock price.

It’s possible that the combined value of the stock and warrants will be worth more than the current Skydance stock price, which would be beneficial to investors. The company’s shares are down 1.6% at $9.02 Monday and are off about 30% this year.

Skydance was known as Paramount Skydance before its purchase of Warner Bros. Discovery last week for over $100 billion (including debt).

Skydance investors will get one warrant for each class B common share.

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The warrants, which are due to begin trading Tuesday on the NYSE under the ticker SKYD WS and go ex-dividend on Wednesday, could be worth close to $3 each, based on options pricing models. The warrants will have a 10-year maturity and are exercisable at $12 a share.

While the warrants have no current intrinsic value with the exercise price above the current stock price, they likely will have some value because of the long maturity and the possibility that Skydance stock will rally in the coming years.

One dynamic worth watching will be activity by S&P index funds, which are expected to dump the warrants Tuesday when they start trading. It’s estimated that index funds could sell 130 million or more of the warrants, or more than 25% of those that will be outstanding. That could put temporary pressure on the warrant price. Index funds likely will be selling the warrants because they won’t be included in the S&P 500 .

The largest group of Skydance investors, who hold about 90% of the company’s 5 billion shares outstanding, will not get the warrants. They are the control shareholders led by the Ellison family and the RedBird Capital investment firm, as well as investors who participated in the company’s billion equity raise last week that was due to raise $47 billion.

Skydance decided to issue the warrants to let public holders participate alongside the control investors and others who bought stock at $12 a share last week to help finance the Warner Bros. deal.

When the warrants are due to go ex-dividend on Wednesday, Skydance stock theoretically should drop by an amount equal to the trading price of the warrants. If the warrants trade for $3, the stock should theoretically trade around $6.

But it’s possible that the stock will drop by less than the warrant value, which would benefit Skydance investors. The argument for a small drop in the stock is that the warrant issuance doesn’t materially change the company’s prospects. Gauging the future trading in the stock, however, is tough to predict.

The company is taking the view that the distribution of the warrants will be a tax-free event for U.S. holders. That position is debatable with New York tax expert Robert Willens saying that it’s likely a taxable event. The status of the distribution rests on interpretations of tax law.

Skydance’s stock has been depressed as investors take a cautious approach to the company and its many challenges arising from the Warner deal, including high debt, integration issues and ambitious financial targets. The stock traded at nearly $20 a week ago.

Barron’s wrote recently that Disney and Netflix looked like better bets for investors who want media and entertainment exposure. But if the Skydance management team led by chairman and co-CEO David Ellison (the son of Oracle chairman Larry Ellison) can make the deal work, there could be a lot of upside to the stock.

Write to Andrew Bary at andrew.bary@barrons.com

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