Paramount’s hunt for WBD has made Zaslav richer – and it may not be over

This isn’t exactly what David Ellison predicted back in September.

Just a few months ago, the Paramount Skydance The CEO sent a letter to Discovery of Warner Bros. The board felt that a combination of the two media and entertainment companies made sense. The letter was the first in a long series proposing increasingly higher prices to acquire the company, as well as arguments for why the assets were a better fit together.

Paramount’s interest triggered a formal sales process, leading to Comcast And Netflix into the mix – which ultimately doubled the value of Warner Bros. shares. Discovery and resulted, at least for the moment, in Paramount losing the bidding war it sparked.

On Friday, Netflix announced a deal to acquire HBO Max and popular film studio Warner Bros. for $27.75 per share, or a net worth of $72 billion. WBD will move forward with a plan to spin off its pay TV networks, such as CNN and TNT Sports, before the deal closes.

Instead of boosting Paramount, just months after taking control of the company through a merger with Skydance, Ellison effectively ceded a valuable jewel of the media and entertainment industry to its most dominant player, thereby strengthening Netflix’s reach and depriving Comcast’s Paramount and NBCUniversal of an obvious merger target.

“It wasn’t for sale before, and they certainly hadn’t cleaned up or separated the assets like they’re doing now,” Netflix co-CEO Ted Sarandos said on a conference call Friday morning after the deal was announced. “I think it kind of comes down to ‘why now’.”

Ellison started a process that made the Warner Bros. CEO a lot of money. Discovery, David Zaslav, to the WBD management team and its shareholders.

Zaslav currently owns over 4.2 million shares of Warner Bros. stock. Discovery, as well as an additional 6.2 million shares that would be delivered to it in the future through previously granted stock awards, according to Equilar. Zaslav also benefits from a grant of nearly 20.9 million options with a strike price of $10.16, Equilar found.

Based on the Netflix-WBD transaction price of $27.75 per share, that all adds up to more than $554 million for the WBD CEO.

Factoring in the additional 4 million shares Zaslav is expected to receive in January, according to a person familiar with the matter who spoke on condition of anonymity discussing the executive’s holdings, the actual total is closer to $660 million.

For shareholders, the sale process brought a similar windfall. Warner Bros. action Discovery closed at $12.54 on September 10, the day before the Wall Street Journal reported that Paramount was preparing a takeover bid for the company.

Friday morning, Warner Bros. shares. Discovery were up nearly 3% to over $25 apiece. That’s more than double the unallocated price from Warner Bros.’ sales process. Discovery and a return to 2022 levels when WarnerMedia and Discovery first merged.

It’s vindication for Zaslav, who spent nearly four years under fire from Hollywood and investors for failing to keep his promises to shareholders. With Friday’s announcement, he effectively took victory from defeat.

And yet, Paramount probably isn’t done with its quest to buy all of Warner Bros. Discovery.

Ellison wasted no time at the helm of Paramount Skydance, transforming the company through deals and acquisitions.

Since the merger closed in August, Paramount has recruited top executives and A-list Hollywood talent such as the Duffer Brothers. It secured the rights to develop a live-action feature film based on Activision’s Call of Duty video game franchise and closed a $7.7 billion deal for the UFC rights.

The Hunt for Ellison at Warner Bros. Discovery has been her biggest venture since she took control of the company.

Paramount’s lawyers sent a letter to Warner Bros. this week. Discovery, first reported by CNBC, claimed the sales process was rigged in Netflix’s direction. Paramount accused Warner Bros. Discovery for failing to properly vet its $30, all-cash offer and selling it to Netflix as a predetermined outcome.

Netflix made an initial offer for WBD’s studio and streaming assets at $27 per share, according to a person familiar with the matter. That trumped Paramount’s offer at the time and steered sale negotiations toward Netflix, said the person, who asked to remain anonymous because the discussions were private.

Paramount was the only bidder interested in acquiring all of WBD’s assets: the movie studio, streaming service and television networks. She argued that her offer was superior.

Paramount executives and advisers have valued Discovery Global’s network portfolio at nearly $2 per share, based on its expected business multiple and estimated leverage ratio, according to people familiar with the matter, who asked not to be named because the discussions were private. Discovery Global would include CNN, TNT Sports and Discovery channels.

Warner Bros. Discovery estimates that Discovery Global could be worth $3 per share or more if it trades well on public markets, according to others with direct knowledge of the matter.

Paramount also argued that there would be tax benefits for shareholders by acquiring the entire company rather than buying just part of it, and that Netflix’s offer came with higher regulatory risk. The Trump administration’s view of the proposed combination is one of “strong skepticism,” CNBC reported Friday.

Paramount has proposed a $5 billion breakup fee if the proposed deal does not gain regulatory approval, according to close sources.

Netflix’s offer included a $5.8 billion breakup fee in case the deal fails to gain regulatory approval, according to a Securities and Exchange Commission filing Friday.

Paramount is now weighing its options on whether to go directly to shareholders with an additional enhanced offer – perhaps even higher than the $30 per share cash offer it submitted to WBD this week.

If so, Netflix would have a chance to match this offer. The end result would mean even more money for WBD shareholders – and more money for Zaslav.

— CNBC’s Nick Wells contributed to this report.

Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC. Versant would become the new parent company of CNBC in Comcast’s planned spinoff of Versant.