(Dec 18): The growing acrimony over the biggest deal in Hollywood is spilling into the open.
On Wednesday, Warner Bros Discovery Inc, 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 Inc.
Counter-attacking publicly for the first time, Warner Bros deemed the Paramount offer “inferior” and “inadequate”. The Warner Bros board criticised Paramount’s backers, software billionaire Larry Ellison and his son David, saying they “consistently misled” them, and suggested their flawed vision for the combined assets would altogether weaken Hollywood.
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.
After an initial cordial phase of negotiations, the tone between the Warner Bros and Paramount camps is turning increasingly combative.
Warner Bros raised several pointed concerns about the Paramount offer, including its uncertain financing and the risk that Paramount could terminate the deal at any time. Paramount has offered US$30 ($38.77) a share in cash for the whole company, including its cable networks. Under the Netflix deal, Warner Bros shareholders will get US$27.75 a share in cash and Netflix stock, as well as shares in the new company that will hold the Warner Bros cable networks.
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In response to a letter the Warner Bros board sent to shareholders on Wednesday, Paramount reaffirmed its commitment to buy the company for US$30 a share, rejecting the board’s assessment.
“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 the Ellisons, 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.
See also: Warner Bros set to reject Paramount bid on funding, terms — Bloomberg
In its letter and a detailed 94-page regulatory filing, Warner Bros hammered away at risks in the Paramount offer, including what the company deemed as the Ellison family’s failure to adequately backstop their US$40.7 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 hadn’t been straightforward with 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 seven 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 US$54 billion in debt commitments from Bank of America Corp, Citigroup Inc and Apollo as well as plans to raise US$41 billion in equity. It’s been previously reported that figure includes US$11.8 billion from the Ellison family, US$24 billion from three Middle East sovereign wealth funds and additional financing from RedBird Capital Partners. Affinity Partners, the investment firm founded by Jared Kushner, US President Donald Trump’s son-in-law, withdrew from the process on Tuesday.
Paramount’s proposal will also require Warner Bros to pay a US$2.8 billion break-up 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 its offer is better and urging them to approve the agreement.
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“The Warner Bros board reinforced that Netflix’s merger agreement is superior and that our acquisition is in the best interest of stockholders,” Ted Sarandos, Netflix's co-CEO, wrote.
Warner Bros shares fell 2.4% to close at US$28.21 in New York on Wednesday. Shares of Netflix were little changed, while Paramount shares declined 5.4%.
Warner Bros’ forceful repudiation on Wednesday “changes nothing”, Forrester analyst Mike Proulx said. “The ultimate decision still rests with Warner Bros shareholders and that vote is months away,” he added. “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 Sept 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 Corp, 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, a co-founder of Oracle Corp, on multiple occasions.
David Ellison has criticised the bidding process, accusing Warner Bros of unfairly favouring Netflix. Warner Bros, in turn, has knocked the Ellisons as aggressive and disorganised for submitting bids after deadlines, failing to address many concerns about its offers and simultaneously threatening and wooing management.
The open antagonism between the Ellisons and Zaslav is a new development. Before the negotiations soured, the Ellisons at one point offered Zaslav the role of a co-CEO of the new company, according to the filing. Zaslav told the Warner Bros board that the Ellisons also indicated to him if a transaction between Paramount and Warner Bros was completed, 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”.
For years, Zaslav has been one of the highest paid executives in Hollywood, a frequent source of irritation among the industry’s increasingly embattled creative community.
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.
Including assumed debt, the Paramount bid values Warner Bros at US$108.4 billion. The Netflix proposal values the assets it’s seeking at about US$82.7 billion, with Warner Bros investors slated to receive shares of the cable spin-off as well. 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 US$9 billion in cost savings planned from its earlier Skydance merger and the proposed acquisition of Warner Bros.
“These targets are both ambitious from an operational perspective and would make Hollywood weaker, not stronger,” the Warner Bros board said.
Uploaded by Tham Yek Lee
