Warner Bros Urges Investors To Reject 'Inferior' Paramount Bid

Warner Bros. Discovery Inc., the parent of HBO and CNN, is advising its shareholders to reject a hostile takeover bid by Paramount Skydance Corp. in favor of its original agreement with streaming giant Netflix Inc., deeming the Paramount offer "inferior" and "inadequate".

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.

Paramount, controlled by software billionaire Larry Ellison and his son David, 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 utilize the coveted Warner Bros. library to boost their streaming operations.

Yet the Warner Bros. board of directors raised several concerns about the Paramount offer, including its uncertain financing and the risk that Paramount could terminate the deal at any time. Paramount has offered $30 a share in cash for the whole company, including its cable networks. Under the Netflix deal, Warner Bros. shareholders will get $27.75 a share in cash and Netflix stock, as well as a stake in the new company that will hold the Warner Bros. cable networks.

The Warner Bros. board flagged risks in the Paramount offer including the Ellison family's failure to adequately backstop their $40.7 billion equity commitment. The equity is supported by "an unknown and opaque revocable trust", the board said in a letter to shareholders Wednesday. The documents Paramount provided “contain gaps, loopholes and limitations that put you, our shareholders, and our company at risk.”

The terms of the Paramount offer include limitations on Warner Bros., such as its ability to refinance debt, the board said. It will also require Warner Bros. to pay a $2.8 billion breakup fee to Netflix. 

The Paramount offer "remains inferior to the Netflix merger", the Warner Bros. board 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".

David Ellison, Paramount’s chief executive officer, has made multiple unsolicited bids to acquire Warner Bros., first proposing the idea in a meeting with Warner Bros. CEO David Zaslav on September 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, the co-founder of Oracle Corp., on multiple occasions.

David Ellison has criticized the bidding process, accusing Warner Bros. of unfairly favoring Netflix. Yet Warner Bros. paints the Ellisons as aggressive and disorganized. The company submitted bids after deadlines, failed to address many concerns about its offers and simultaneously threatened and wooed management. 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 $108.4 billion. The Netflix proposal values the assets it’s seeking at about $82.7 billion, with Warner Bros. investors slated to receive the proceeds of the cable spinoff as well. Some shareholders, including money manager Mario Gabelli, support a competitive auction of Warner Bros., believing that both Paramount and Netflix could raise their bids.

Both bids have sparked concern in Hollywood about the impact of further consolidation and criticism from across the political spectrum. 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.

The cost cuts Paramount has proposed "would make Hollywood weaker, not stronger", the board said.

The latest offer from Ellison included $11.8 billion from the Ellison family, $24 billion from three Middle East sovereign wealth funds, and additional financing from RedBird Capital Partners. Affinity Partners, the investment firm founded by President Donald Trump’s son-in-law Jared Kushner, withdrew from the process on Tuesday.