Takeover bid for Paramount WBD: arguments for and against

Hours before Discovery of Warner Bros. agreed to sell its studio and streaming assets to NetflixTed Sarandos, co-CEO of Netflix, called David Zaslav, CEO of WBD, to inform him that Netflix would not make a higher offer.

WBD shareholders now have the opportunity to bluff Sarandos.

WBD shareholders have until January 21 to offer their shares to Paramount for $30 in cash, although this deadline may be artificial. Paramount may extend it to the WBD annual meeting, which has not yet been scheduled but took place this year on June 2.

If Paramount acquires 51% of WBD’s outstanding shares, it would control the company, even though WBD’s board has already agreed to sell the company’s studios and streaming assets to Netflix. Netflix and Paramount can use the coming days and weeks to talk with WBD shareholders to determine whether they want to accept Paramount’s offer or stick with the board’s recommendation to sell to Netflix.

To bid or not to bid, that is the question. There are strong arguments for both sides. The decision also presents an element of game theory for shareholders who simply want a bidding war rather than worrying about the right buyer.

There are two main reasons why a shareholder might offer their shares to Paramount.

The first is whether the investor believes that Paramount’s $30 per share cash offer for all of WBD is more valuable than Netflix’s $27.75 per share offer for the Warner Bros. movie studio. and the HBO Max streaming business. The second is the belief that the stock offering is the best way to provoke a bidding war between Netflix and Paramount.

A shareholder might decide that Paramount’s current offer is better than Netflix’s if he thinks it has a better chance of regulatory approval or if he believes that Discovery Global — the portfolio of linear cable networks including CNN, TNT, Discovery, HGTV and TBS that is about to be spun off — will have minimal value as a publicly traded company.

Paramount Skydance CEO David Ellison told CNBC earlier this month that he valued Discovery Global at $1 per share, given his prediction on the likely multiple (twice earnings before interest, taxes, depreciation and amortization) at which it would trade based on current valuations of similar linear cable networks. If WBD does not agree to sell the entire company to Paramount, it plans to spin off Discovery Global into its own publicly traded entity in mid-2026.

Paramount’s argument is that $30 per share is already higher than Netflix’s $27.75 per share offer plus $1 per share for Discovery Global.

Paramount’s offer is also all cash, while Netflix’s offer includes 16% equity with what’s called a collar, meaning shareholders won’t know exactly how many Netflix shares they’ll actually receive until the deal closes.

As for regulatory approval, Paramount has made arguments that a combined Netflix and HBO Max streaming business would be anticompetitive. Netflix has more than 300 million paying customers worldwide. The idea of ​​the biggest streamer buying HBO Max has already raised concerns among politicians, including President Donald Trump, who said there could be a “market share” issue with a deal with Netflix.

While Paramount would combine Paramount+ with HBO Max, Paramount+ has around 80 million subscribers, posing less risk to competition.

The second, more nuanced argument in favor of a competitive tender is to maximize the upside potential even if the assets ultimately go to Netflix.

Ellison has already made it known that Paramount’s offer of $30 per share was not the best and definitive one. A competitive bidding process could result in Netflix coming back with a higher offer, which could then prompt Paramount to increase its offer as well.

GAMCO Investors Chairman and CEO Mario Gabelli told CNBC earlier this month “the idea that companies A and B are in a bidding war — that’s what we like about the free market system.”

He added last week that while he was previously inclined to divest his shares to Paramount, “the most important thing is to keep them in play.”

Other shareholders could, conversely, think that not launching a call for tenders is the best way to restart a bidding war. If Paramount finds that it is not getting shareholder buy-in as the annual meeting approaches, it could increase its offer to attract more shareholders.

There are other reasons not to bid. Shareholders may want the Netflix and Discovery Global stock portion of the Netflix proposal.

In a WBD filing last week, the company said a mysterious “Corporation C” was offering to acquire Discovery Global and its 20% stake in WBD’s streaming and studio businesses for $25 billion in cash. This offer was rejected by the WBD Board of Directors as “non-actionable.”

Still, the mysterious offer suggests there could be an interested buyer in all of Discovery Global in the event of a spinoff, which could fetch well over $1 per share, according to Rich Greenfield, an analyst at LightShed Partners. That’s a good reason not to go out to tender, he said, because it makes Netflix’s bid much more attractive than Paramount’s.

Ensuring the WBD Discovery Global spin-off is also a safe play for shareholders in case regulators block a Paramount-WBD merger, Greenfield said. Since Paramount’s deal involves all of WBD, including CNN, Ellison’s offer — which includes about $24 billion from Middle Eastern sovereign wealth funds — could face regulatory and political hurdles, Greenfield noted.

“You want the split to happen,” Greenfield said in an interview. “If the Paramount deal doesn’t get regulatory approval, you’ve now stopped the split from happening. You’re stuck in 2027 with cable networks in decline, and you haven’t split them up. Does the United States really want a company funded by more Middle Eastern money than money from the Ellisons, who own CNN?”

WBD’s board argued that part of the reasoning for rejecting Paramount’s $30-per-share offer was concern about financing, noting that more funding came from Middle Eastern sovereign wealth funds than from the Ellison family, which committed about $12 billion.

Paramount changed the terms of its deal Monday to help address financing concerns. Oracle founder Larry Ellison, David’s father and one of the world’s five richest people, agreed to provide “an irrevocable personal guarantee of $40.4 billion of the equity financing for the offering and any damages claim against Paramount” if the existing financing failed, Paramount said in a statement.

Paramount also announced Monday that it would release documents confirming that the Ellison family trust “owns approximately 1.16 billion shares of Oracle common stock and that all material liabilities of the Ellison family trust are publicly disclosed.” Paramount said the family trust would guarantee the financing. The WBD board had previously argued that the trust was an “opaque entity”, preferring direct engagement from the Ellisons.

Notably, even with Monday’s announcement, the Ellisons have not increased their equity investment, which still stands at $12 billion. Internally, some WBD executives cited the 1970 Carl Reiner film “Where’s Poppa?” when speaking about the offer, according to a person familiar with the matter. WBD pushed the Ellisons to put more personal money into the deal.

Still, a WBD shareholder may not care where the funding comes from as long as it’s there. The three sovereign wealth funds involved in the operation are the Saudi Public Investment Fund, Abu Dhabi’s Imad Holding Co. and the Qatar Investment Authority. PIF and QIA, in particular, are well-known institutions that have contributed billions of dollars to other US-based deals.

Correction: This story has been revised to correct that Warner Bros. shareholders. Discovery have until January 21 to offer their shares to Paramount for $30 in cash. A previous version incorrectly indicated this deadline.