hostile

The board of Warner Bros Discovery (WBD) has unanimously turned down Paramount Skydance’s latest attempt to acquire the studio, saying its revised $108.4bn hostile bid amounted to a risky leveraged buyout that investors should reject.

In a letter to shareholders on Wednesday, the WBD board said Paramount’s offer hinges on “an extraordinary amount of debt financing” that heightens the risk of closing. It reaffirmed its commitment to streaming giant Netflix’s $82.7bn deal for the film and television studio and other assets.

Some investors, however, pushed back on Warner Bros. Pentwater Capital Management CEO Matthew Halbower said that the media giant’s board had “made an error” by not considering Paramount’s bid.

On CNBC on Wednesday, Halbower called the deal “economically superior”.

Paramount’s financing plan would saddle the smaller Hollywood studio with $87bn in debt once the acquisition closes, making it the largest leveraged buyout in history, the Warner Bros board told shareholders after voting against the $30-per-share cash offer on Tuesday. The letter accompanied a 67-page amended merger filing that laid out its case for rejecting Paramount’s offer.

Paramount deal ‘remains inadequate’

The revised Paramount offer “remains inadequate particularly given the insufficient value it would provide, the lack of certainty in Paramount Skydance ability to complete the offer, and the risks and costs borne by WBD shareholders should Paramount Skydance fail to complete the offer”, the Warner Bros board wrote.

Paramount, which has a market value of about $14bn, proposed to use $40bn in equity, which would be personally guaranteed by Oracle’s billionaire co-founder Larry Ellison, whose son David is Paramount’s CEO, and $54bn in debt to finance the deal.

Its financing plan would further weaken its credit rating, which S&P Global already rates at junk levels, and strain its cash flow – heightening the risk that the deal will not close, the Warner Bros board said. Netflix, which has offered $27.75 a share in cash and stock, has a $400bn market value and investment-grade credit rating.

The decision keeps Warner Bros on track to pursue the deal with Netflix, even after Paramount amended its bid on December 22 to address the earlier concerns about the lack of a personal guarantee from Ellison, who is Paramount’s controlling shareholder.

Paramount and Netflix have been vying to win control of Warner Bros, and with it, its prized film and television studios and its extensive content library. Its lucrative entertainment franchises include  Harry Potter, Game of Thrones, Friends, and the DC Comics universe; as well as coveted classic films such as Casablanca and Citizen Kane.

Netflix applauds

Netflix co-CEOs Ted Sarandos and Greg Peters welcomed Warner Bros’ decision on Wednesday, saying it recognises the streaming giant’s deal “as the superior proposal that will deliver the greatest value to its stockholders, as well as consumers, creators and the broader entertainment industry”.

Warner Bros Chairman Samuel Di Piazza told CNBC that the company was not currently in talks with Paramount but remains open to a transaction with the Ellison-led firm, and both the deals have a path to regulatory approval.

“From our perspective, they’ve got to put something on the table that is compelling,” he said, referring to the Paramount offer.

Wednesday’s filing said Warner Bros’ board met on December 23 to review Paramount’s amended offer and noted some improvements, including Ellison’s personal guarantee and a higher reverse termination fee of $5.8bn, but found “significant costs” associated with Paramount’s bid compared with a Netflix deal.

Warner Bros would be obligated to pay the streaming service a $2.8bn termination fee for abandoning its merger agreement with Netflix, $1.5bn in fees to its lenders and about $350m in additional financing costs. Altogether, Warner Bros said it would incur about $4.7bn in additional costs to terminate its deal with Netflix, or $1.79 per share.

The board repeated some concerns it had laid out on December 17, such as that Paramount would impose operating restrictions on the studio that would harm its business and competitive position, including barring the planned spin-out of the company’s cable television networks into a separate public company, Discovery Global.

Paramount offered “insufficient compensation” for the damage done to the studio’s business, if the Paramount deal failed to close, Warner Bros said.

Paramount “repeatedly failed to submit the best proposal” to Warner Bros shareholders, the board wrote, “despite clear direction” on the deficiencies in its bid and potential solutions.

The jockeying for Warner Bros has become Hollywood’s most closely watched takeover battle, as studios race to scale up amid intensifying competition from streaming platforms and volatile theatrical revenues.

While Netflix’s offer has a lower headline value, analysts have said it presents a clearer financing structure and fewer execution risks than Paramount’s bid for the entire company, including its cable TV business.

“WBD does not want to sell to Paramount, so it will keep rejecting Paramount as long as it is able to,” said Ross Benes, an analyst at eMarketer.

“But this process is not over … Paramount will have opportunity to make further attempts.”

Harris Oakmark, Warner Bros’ fifth-largest investor, previously told Reuters that Paramount’s revised offer was not “sufficient”, noting it was not enough to cover the breakup fee.

Paramount has argued its bid would face fewer regulatory obstacles, but a combined Paramount-Warner Bros entity would create a formidable competitor to industry leader Disney and merge two major television operators and two streaming services.

The valuation of Warner Bros’ planned Discovery Global spin-off, which includes cable television networks CNN, TNT Sports and the Discovery+ streaming service, is seen as a major sticking point. Analysts peg the cable channels’ value at up to $4 per share, while Paramount has suggested just $1.

Lawmakers from both parties have raised concerns about further consolidation in the media industry, and US President Donald Trump has said he plans to weigh in on the landmark acquisition.

On Wall Street, Warner Bros Discovery is up 0.3 percent in midday trading amid the news of the rejected bid. Netflix is also up 0.3. Meanwhile, Paramount is down 0.1 percent.

Dec. 22 (UPI) — Paramount Skydance amended its hostile bid to take over Warner Bros. Discovery, guaranteeing the backing of Larry Ellison.

“Larry Ellison has agreed to provide an irrevocable personal guarantee of $40.4 billion of the equity financing for the offer and any damages claims against Paramount,” the company said in a press release. Ellison also agreed not to revoke the Ellison family trust or adversely transfer its assets during the pendency of the transaction.

Last week, WBD urged its shareholders not to accept Paramount’s bid, saying it wasn’t backed by billionaire Larry Ellison, father of Paramount’s CEO.

WBD agreed to sell to Netflix but Paramount, which had been in a bidding war with Netflix, mounted a hostile bid.

Paramount didn’t raise its bid of $30 a share, saying it believes the bid is superior. But it did raise its proposed reverse breakup fee to match Netflix’s offer.

“What we’ve done in this amended filing is we’ve cleared the brush of obfuscation around the offer,” said Gerry Cardinale, founder and managing partner of RedBird Capital Partners, on CNBC’s Squawk Box on Monday.

RedBird is an investor in Paramount Skydance and has committed to financing the proposed purchase.

Cardinale said the bid is backed by 1.2 billion Oracle shares in an irrevocable trust.

“Like we’ve done through the six bids that we’ve made, we are being responsive to what their concerns are,” Cardinale said.

Warner Bros. Discovery shares jumped 4% in early trading Monday, while Paramount shares rose almost 6%, CNBC reported. Netflix shares dipped slightly.

“Paramount has repeatedly demonstrated its commitment to acquiring WBD. Our $30 per share, fully financed all-cash offer was on Dec. 4, and continues to be, the superior option to maximize value for WBD shareholders,” David Ellison said in a statement. “Because of our commitment to investment and growth, our acquisition will be superior for all WBD stakeholders, as a catalyst for greater content production, greater theatrical output, and more consumer choice. We expect the board of directors of WBD to take the necessary steps to secure this value-enhancing transaction and preserve and strengthen an iconic Hollywood treasure for the future.”

Warner Bros. Discovery has sharply rejected Paramount’s latest offer, alleging the Larry Ellison family has failed to put real money behind Paramount’s $78-billion bid for Warner’s legendary movie studio, HBO and CNN.

Paramount “has consistently misled WBD shareholders that its proposed transaction has a ‘full backstop’ from the Ellison family,” Warner Bros. Discovery’s board wrote in a Wednesday letter to its shareholders filed with the Securities & Exchange Commission.

“It does not, and never has,” the Warner board said.

For Warner, what was missing was a clear declaration from Paramount that the Ellison family had agreed to commit funding for the deal. A Paramount representative was not immediately available for comment Wednesday.

The Warner auction has taken a nasty turn. Last week, Paramount launched a hostile takeover campaign for Warner after losing the bidding war to Netflix. Warner board members unanimously approved Netflix’s $72-billion deal for the Warner Bros. film and television studios, HBO and HBO Max.

In its letter, the Warner board reaffirmed its support for Netflix’s proposal, saying it represented the best deal for shareholders. Warner board members urged investors not to tender their shares to Paramount.

Board members said they were concerned that Paramount’s financing was shaky and the Ellison family’s assurances were far from ironclad. Warner also said Paramount’s proposal contained troubling caveats, such as language in its documents that said Paramount “reserve[d] the right to amend the offer in any respect.”

The Warner board argued that its shareholders could be left holding the bag.

Paramount Chief Executive David Ellison has argued his $78-billion deal is superior to Netflix’s proposal.

(Evan Agostini / Evan Agostini/invision/ap)

Paramount Chairman David Ellison has championed Paramount’s strength in recent weeks saying his company’s bid for all of Warner Bros. Discovery, which includes HBO, CNN and the Warner Bros. film and television studios, was backed by his wealthy family, headed by his father, Oracle co-founder Larry Ellison, one of the world’s richest men.

In its letter last week to shareholders, asking for their support, Ellison wrote that Paramount delivered “an equity commitment from the Ellison family trust, which contains over $250 billion of assets,” including more than 1 billion Oracle shares.

In regulatory filings, Paramount disclosed that, for the equity portion of the deal, it planned to rely on $24 billion from sovereign wealth funds representing the royal families of Saudi Arabia, Qatar and Abu Dhabi as well as $11.8 billion from the Ellison family (which also holds the controlling shares in Paramount). This week, President Trump’s son-in-law Jared Kushner’s Affinity Partners private equity firm pulled out of Paramount’s financing team.

Paramount’s bid would also need more than $60 billion in debt financing.

Paramount has made six offers for Warner Bros., and its “most recent proposal includes a $40.65 billion equity commitment, for which there is no Ellison family commitment of any kind,” the Warner board wrote.

“Instead, they propose that [shareholders] rely on an unknown and opaque revocable trust for the certainty of this crucial deal funding,” the board said.

Throughout the negotiations, Paramount, which trades under the PSKY ticker, failed to present a solid financing commitment from Larry Ellison — despite Warner’s bankers telling them that one was necessary, the board said.

“Despite … their own ample resources, as well as multiple assurances by PSKY during our strategic review process that such a commitment was forthcoming – the Ellison family has chosen not to backstop the PSKY offer,” Warner’s board wrote.

Board members argued that a revocable trust could always be changed. “A revocable trust is no replacement for a secured commitment by a controlling stockholder,” according to the board letter.

David Ellison has insisted Paramount’s Dec. 4 offer of $30 a share was superior to Netflix’s winning bid. Paramount wants to buy all of Warner Bros. Discovery, while Netflix has made a deal to take Warner’s studios, its spacious lot in Burbank, HBO and HBO Max streaming service.

Paramount’s lawyers have argued that Warner tipped the auction to favor Netflix.

Paramount, which until recently enjoyed warm relations with President Trump, has long argued that its deal represents a more certain path to gain regulatory approvals. Trump’s Department of Justice would consider any anti-trust ramifications of the deal, and in the past, Trump has spoken highly of the Ellisons.

However, Warner’s board argued that Paramount might be providing too rosy a view.

“Despite PSKY’s media statements to the contrary, the Board does not believe there is a material difference in regulatory risk between the PSKY offer and the Netflix merger,” the Warner board wrote. “The Board carefully considered the federal, state, and international regulatory risks for both the Netflix merger and the PSKY offer with its regulatory advisors.”

The board noted that Netflix agreed to pay a record $5.8 billion if its deal fails to clear the regulatory hurdles.

Paramount has offered a $5 billion termination fee.

Should Warner abandon the transaction with Netflix, it would owe Netflix a $2.8 billion break-up fee.

Warner also pointed to Paramount’s promises to Wall Street that it would shave $9 billion in costs from the combined companies. Paramount is in the process of making $3 billion in cuts since the Ellison family and RedBird Capital Partners took the helm of the company in August.

Paramount has promised another $6 billion in cuts should it win Warner Bros.

“These targets are both ambitious from an operational perspective and would make Hollywood weaker, not stronger,” the Warner board wrote.