WBD’s board rejects Paramount’s offer

Warner Bros Discovery’s board rejected Paramount Skydance’s hostile $108.4 billion takeover bid on Wednesday, calling the offer “fraudulent” as it accused the studio giant of misleading shareholders about its financing.

Paramount has been in a race with Netflix to win control of Warner Bros., and with it, its award-winning movie and TV studios, its HBO Max streaming service and franchises like “Harry Potter.”

After Warner Bros. accepted the streaming giant’s offer, Paramount launched a hostile bid to beat that offer.

In a letter to shareholders Wednesday, Warner Bros.’s board wrote that Paramount “consistently misled” Warner Bros. shareholders that the $30-a-share cash offer was fully guaranteed or “backed” by the Ellison family, led by billionaire Oracle co-founder Larry Ellison.

“It has not, and never has,” the board wrote of Paramount’s bid guarantee, noting that the bid carried “many, significant risks.”

The board said it found Paramount’s offer “inferior” to the merger deal with Netflix. Netflix’s $27.75 per share offer for the Warner Bros unit is a binding deal that requires no equity financing and has strong debt covenants, the board wrote.

The board also said the offer could be terminated or amended at any time before the deal is completed, which is not the same as a binding merger agreement. Warner Bros. has not yet set a date for a shareholder vote on the deal, but it is expected sometime in the spring or early summer, chairman Samuel Di Piazza told CNBC in an interview.

The Ellisons cited their relationship with US President Donald Trump as a reason why the deal would face an easier regulatory path.

Netflix welcomes the move

Paramount did not immediately respond to a Reuters request for comment, while Netflix welcomed the move. “The Warner Bros. Discovery Board reinforced that the Netflix merger agreement is superior and that our acquisition is in the best interests of shareholders,” said co-chief counsel Ted Sarandos.

Netflix is ​​already in talks with the U.S. Department of Justice and the European Commission, its other co-chief counsel Greg Peters told CNBC, while expressing his confidence in how regulators will view the deal. Shares of Warner Bros fell 1.2% to $28.50 in early trading, while Netflix gained 2.5% and Paramount fell 4.8%. Netflix has told Warner Bros. it will continue to release the studio’s films in theaters in an effort to ease fears that its deal would eliminate another studio and a major source of theatrical releases, according to people familiar with the matter.

Paramount last week made its case directly to Warner Bros. shareholders, saying it has arranged “tight financing” to back its bid, with $41 billion in new equity secured by the Ellison family and RedBird Capital and $54 billion in debt commitments from Bank of America, Citi and Apollo.

The Warner Bros. board countered that Paramount’s latest offer includes an equity commitment “for which there is no Ellison family commitment of any kind,” but rather the backing of an “unknown and opaque” Lawrence J Ellison Revocable Trust, whose assets and liabilities are not publicly disclosed and subject to change.

“Despite the fact that WBD has repeatedly said how important a full and unconditional funding commitment from the Ellison family was … the Ellison family has chosen not to terminate the PSKY bid,” the Warner Bros. board wrote. “A revocable trust is not a substitute for a secured commitment by a controlling shareholder.”

Reliability

Paramount has submitted a total of six bids to acquire the entire Warner Bros. studio, including its television networks, including CNN and TNT Sports. He has previously said the Ellison family trust — which Paramount says contains more than $250 billion in assets, including about 1.16 billion Oracle shares — is more than sufficient to cover the equity commitment.

Warner Bros. has raised questions about Paramount’s financial health and creditworthiness. The offer is based on a seven-party, multi-term structure, with the Ellison Revocable Trust providing just 32% of the required equity commitment, while limiting its liability to $2.8 billion, Warner Bros. said. He noted that the trust’s assets could be withdrawn at any time.

“PSKY’s offer provides an unreasonable degree of risk and potential downside for WBD shareholders,” the board wrote.

Debt levels

The Warner Bros. board noted that Netflix has an investment-grade rating and a market value in excess of $400 billion. Paramount, by contrast, has a market capitalization of $15 billion and a credit rating “one notch above junk,” Warner Bros. said Wednesday.

A combination would leave Paramount with a debt ratio of 6.8 times its operating income “with virtually no current free cash flow.”

The bidder will also impose what Warner Bros. said would be “onerous operating restrictions” on the company during the potentially lengthy period between signing and closing, including limits on new content licensing agreements.

Paramount’s plan to achieve $9 billion in “synergies” at the two studios was described as “ambitious” from an operational standpoint, the Warner Bros. board noted, and would represent a new round of job losses that would “make Hollywood weaker, not stronger.”

Warner Bros. Discovery’s board rejected Paramount’s accusations of wrongdoing — made in a filing by Paramount last week — saying it held dozens of calls and meetings with studio executives and advisers, including four one-on-one meetings and meals with CEO David Zaslav and Paramount CEO David Ellison or his father, David Ellison.

“After each bid, we informed PSKY of the hardware deficiencies and offered possible solutions,” the Warner Bros. board wrote. “Despite these comments, PSKY never submitted a proposal superior to the Netflix merger agreement.”