I had the similar issue. My series 3 was working. Itchy hand went to update it. My watchOS was 6.3.6. And an error asked me to unpair. After unpaired, factory restored and stuck at preparing. Won’t let me to continue pair the Watch first. MUST UPDATE to continue. My Wifi is good and 1.3GB firmware is downloaded to the watch. I kept on repeating the same steps for 3 weeks but failed. So frustrating and I thought this Watch will be unusable and Apple is forcing us to buy new.
Until two days ago, iOS 16.3 was released. I updated it on my phone. Gave a try in the morning, still stuck at preparing. So went out to work. Then tried another time in the evening and left it be. The next thing I checked, I was so happy the “preparing” has started to move.
Successfully installed the updates and paired it.
Hope you guys also lucky to fix it soon.