Warner Bros. Rejects Paramount's $108 Billion Bid; Netflix Still in the Running

Warner Bros. Discovery has declined Paramount Skydance's $108.4 billion hostile takeover offer, citing concerns about the bid's financial backing and potential risks to its shareholders. The media giant communicated its decision in a letter to shareholders disclosed in a regulatory filing.

The Warner Bros. Discovery board stated that Paramount had repeatedly misled investors by asserting that its $30-per-share cash offer was fully guaranteed by the Ellison family, headed by Oracle CEO Larry Ellison. According to Warner Bros. Discovery, this was not the case, and the bid was never fully secured, presenting "numerous, significant risks."

The board emphasized that Paramount's proposal was less attractive than Warner Bros. Discovery's existing merger agreement with Netflix. Netflix's binding offer of $27.75 per share encompasses Warner Bros.' film and television studios, its content library, and the HBO Max streaming service. The board highlighted that the Netflix deal requires no equity financing and is supported by solid debt commitments.

Paramount has defended its bid, claiming it has "air-tight financing," including $41 billion in new equity from the Ellison family and RedBird Capital, alongside $54 billion in debt commitments from Bank of America, Citi, and Apollo. That said, the reality is a bit more complicated. Warner Bros. Discovery countered that Paramount's latest proposal involves an equity commitment lacking direct Ellison family backing. Instead, it relies on the Lawrence J. Ellison Revocable Trust, whose financial details are not publicly available and subject to change.

Warner Bros. Discovery's board pointed out that the trust cannot be considered a substitute for a secured commitment from a controlling shareholder. The trust would only provide 32% of the required equity, capping its liability at $2.8 billion. Furthermore, the assets within the trust are subject to withdrawal at any time.

Paramount has submitted six bids for Warner Bros. Discovery, including its television networks like CNN and TNT Sports. The company has defended the financial soundness of the Ellison family trust, stating it holds over $250 billion in assets, including approximately 1.16 billion Oracle shares. Paramount has refuted any suggestions that it might not be able to meet its financial obligations.

Warner Bros. Discovery's assessment raised concerns regarding Paramount's overall financial health, creditworthiness, and the structure of its proposed financing. The board noted Paramount's market capitalization of approximately $15 billion and its credit rating, which is just above junk status. They projected that if the deal were to proceed, Paramount's debt would increase to 6.8 times its operating income, with minimal current free cash flow.

Moreover, Warner Bros. Discovery stated that Paramount would impose restrictive operating conditions during the period between signing and closing, including limitations on new content licensing agreements. They deemed Paramount's target of $9 billion in synergies as overly ambitious and cautioned that it would lead to further job losses, weakening the industry.

In contrast, Warner Bros. Discovery emphasized that Netflix is a public company with a market value exceeding $400 billion and an investment-grade balance sheet. Netflix has assured Warner Bros. Discovery that it will continue releasing films in cinemas, addressing concerns about reduced theatrical output.

Warner Bros. Discovery also cited deal certainty as a factor, noting that Netflix offered a $5.8 billion break-up fee compared to Paramount's $5 billion. They characterized Paramount's proposal as "illusory," stating that it could be terminated or amended at any point before completion, unlike a binding merger agreement.

Responding to Paramount's claims of unfair treatment, the Warner Bros. Discovery board stated that it held numerous calls and meetings with Paramount's leadership and advisors, including multiple in-person meetings involving Warner Bros. CEO David Zaslav and Paramount executives.

The board asserted that it repeatedly highlighted deficiencies in Paramount's bids and suggested potential solutions, but never received a proposal that surpassed the Netflix agreement.

The board stated it considered regulatory risks for both offers and believes either transaction could secure the necessary approvals in the United States and abroad. That said, the reality is a bit more complicated. it concluded that Paramount's bid presented unacceptable risk and downside for Warner Bros. Discovery shareholders.