Lucas Shaw, Michelle F. Davis and Hannah Miller
Warner Bros. Discovery, the parent of HBO and CNN, advised its shareholders to reject a hostile takeover bid by Paramount Skydance Corp. in favour of its original agreement with streaming giant Netflix, deeming the Paramount offer “inferior” and “inadequate.”
Paramount, the parent of CBS and Nickelodeon, has been appealing directly to Warner Bros. shareholders with an offer to buy the whole company after the Warner Bros. board agreed to sell its streaming and studios businesses to Netflix. Warner Bros. plans to spin its cable networks, like CNN and TNT, into a separate company before completing the Netflix deal.
Warner Bros. raised several concerns about the Paramount offer, including its uncertain financing and the risk that Paramount could terminate the deal at any time. Paramount has offered $US30 a share in cash for the whole company, including its cable networks. Under the Netflix deal, Warner Bros. shareholders will get $US27.75 a share in cash and Netflix stock, as well as shares in the new company that will hold the Warner Bros. cable networks.
In response to a letter Warner Bros. board sent to shareholders Wednesday, Paramount reaffirmed its commitment to buy the company for $US30 a share. Including assumed debt, the Paramount bid values Warner Bros. at $US108.4 billion ($164 billion). The Netflix proposal values the assets it’s seeking at about $US82.7 billion, with Warner Bros. investors slated to receive shares of the cable spinoff as well.
“Our proposal clearly offers Warner Bros. shareholders superior value and certainty, a clear path to close, and does not leave them with a heavily indebted sub-scale linear business,” Paramount chief executive officer David Ellison said in a statement. “I have been encouraged by the feedback we have received from Warner Bros. shareholders who clearly understand the benefits of our offer.”
Paramount, controlled by software billionaire Larry Ellison and his son David, is competing with the most valuable entertainment company in the world to acquire Warner Bros., one of Hollywood’s most storied studios, as well as HBO, one of the crown jewels of the TV business. Executives from both Paramount and Netflix have argued that they would be the best owners and utilise the coveted Warner Bros. library to boost their streaming operations.
In its letter and a detailed 94-page regulatory filing, the board flagged risks in the Paramount offer, including the Ellison family’s failure to adequately backstop their $US40.7 billion equity commitment. The equity is supported by “an unknown and opaque revocable trust,” the board said. The documents Paramount provided “contain gaps, loopholes and limitations that put you, our shareholders, and our company at risk.”
The Warner Bros. board said Paramount has “consistently misled” shareholders when it said its proposal had a “full backstop” by the Ellison family.
The board said if Paramount’s proposed deal were to close, it would carry a debt load nearly 7 times larger than the combined company’s earnings before interest, taxes, depreciation and amortisation. “Such debt levels reflect a risky capital structure that is vulnerable to even potentially small changes” in Paramount or Warner Bros.′ business between signing and closing, according to the letter.
The latest offer from Paramount included $US54 billion in debt commitments from Bank of America Corp., Citigroup and Apollo as well as plans to raise $US41 billion in equity. It’s been previously reported that includes $US11.8 billion from the Ellison family, $US24 billion from three Middle East sovereign wealth funds and additional financing from RedBird Capital Partners. Affinity Partners, the investment firm founded by President Donald Trump’s son-in-law Jared Kushner withdrew from the process on Tuesday.
Paramount’s proposal will also require Warner Bros. to pay a $US2.8 billion breakup fee to Netflix.
The Paramount offer “remains inferior to the Netflix merger,” Warner Bros. wrote. The board unanimously recommended the Netflix deal, saying “the terms of the Netflix merger are superior,” while the Paramount offer “provides inadequate value and imposes numerous, significant risks and costs.”
Netflix issued a letter to Warner Bros. shareholders on Wednesday morning reiterating why it’s offer is better and urging them to approve the agreement.
“The Warner Bros. Discovery board reinforced that Netflix’s merger agreement is superior and that our acquisition is in the best interest of stockholders,” Ted Sarandos, Netflix co-chief executive officer, wrote.
Warner Bros. shares were down 1 per cent to $US28.59 in New York on Wednesday morning. Shares of Netflix were up 1.8 per cent while Paramount shares were down 4.6 per cent.
Warner Bros.′ “formal rejection of Paramount’s offer changes nothing,” Forrester analyst Mike Proulx said. “The ultimate decision still rests with Warner Bros. shareholders and that vote is months away. What’s clear about Paramount’s bid are the growing eyebrow raises over its Middle Eastern financing. The same US officials and regulators who’ve sounded alarms about China’s influence on TikTok should be crying foul here.”
Ellison has made multiple unsolicited bids to acquire Warner Bros., first proposing the idea in a meeting with Warner Bros. CEO David Zaslav on September 14, according to a regulatory filing. The board rejected the bid, but Ellison’s pursuit over the following month, including two more offers, triggered interest from Netflix and Comcast., as well as other unidentified parties.
The outreach from potential bidders prompted the Warner Bros. board to initiate a strategic review and enter private negotiations with several suitors. Netflix, Comcast and Paramount emerged as the most serious bidders. Zaslav met with David Ellison or his father, the co-founder of Oracle Corp., on multiple occasions.
David Ellison has criticised the bidding process, accusing Warner Bros. of unfairly favouring Netflix. Yet Warner Bros. paints the Ellisons as aggressive and disorganised. The company submitted bids after deadlines, failed to address many concerns about its offers and simultaneously threatened and wooed management.
According to the filing, Zaslav told Warner Bros. board that the Ellisons indicated that if a transaction between Paramount and Warner Bros. was completed, that he would receive a compensation package “worth several hundred millions of dollars.” He told the board that he had “informed the Ellisons that it would be inappropriate to discuss any such arrangements at that time.”
Warner Bros. said it repeatedly raised concerns about insufficient evidence the Ellison family would backstop any deal. Netflix, by contrast, addressed each of the board’s concerns, the company said.
Some investors, including money manager Mario Gabelli, support a competitive auction of Warner Bros, believing that both Paramount and Netflix could raise their bids.
A deal with either suitor will trigger a months-long regulatory review. While Paramount has insisted it has the best chance of getting its deal approved by regulators, Warner Bros. said it believes Netflix and Paramount are on equal footing there.
Both bids have sparked concern in Hollywood about the impact of further consolidation and criticism from across the political spectrum.
Paramount is targeting $US9 billion in cost savings planned from its earlier Skydance merger and the proposed acquisition of Warner Bros., the board said. “These targets are both ambitious from an operational perspective and would make Hollywood weaker, not stronger.”
Bloomberg
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