Paramount gets the cold shoulder from Warner Bros Discovery board

NEW YORK: Paramount  Skydance is getting the Hollywood brush-off. On  17 December  Warner Bros Discovery (WBD) told shareholders in no uncertain terms to reject Paramount’s $108.4 billion tender offer, launched just nine days earlier. The board’s verdict? The deal is dodgy, inadequate and—in a particularly cutting phrase—”illusory.”

WBD’s directors are sticking with Netflix instead. Their 5 December  merger agreement offers shareholders $23.25 in cash, plus $4.50 in Netflix stock, plus shares in a newly spun-off entity called Discovery Global. WBD  board chair  Samuel Di Piazza junior called the Netflix deal “superior, more certain value.” Translation: Paramount’s proposal is neither superior nor certain.

The board’s beef with Paramount centres on financing. Despite “headline claims” of a “full backstop” from the Ellison family (Oracle’s billionaire clan, who control Paramount), no such commitment exists. Instead, Paramount is relying on what WBD dismissively calls “an unknown and opaque revocable trust”—hardly the stuff of deal certainty. The trust’s liability cap for breaching the deal? A measly $2.8 billion, or seven per cent of the transaction value. WBD reckons actual damages would be “many multiples” higher.

Then there’s Paramount’s precarious finances. The company sports a market capitalisation of just $15 billion and credit ratings hovering near junk status. If the deal closed, Paramount would be saddled with gross leverage of 6.8 times debt to earnings before interest, taxes, depreciation and amortisation, with “virtually no current free cash flow.” Netflix, by contrast, boasts a $400 billion-plus market cap and an investment-grade balance sheet. No financing required.

Paramount’s offer also comes with strings attached—and loopholes. The first paragraph reserves the right to amend terms “at any time,” including the offer price. It can’t even close by its expiration date, given regulatory approvals that Paramount admits could take 12 to 18 months. “Nothing in this structure offers WBD shareholders any deal certainty,” the board sniffed.

Adding insult to injury, accepting Paramount’s offer would cost WBD shareholders dearly. The company would owe Netflix a $2.8 billion termination fee (which Paramount hasn’t offered to cover) plus $1.5 billion in financing costs from a scuppered debt exchange. That’s $4.3 billion, or $1.66 per share, in potential losses if Paramount’s deal collapses.

WBD insists its three-month strategic review was “full, transparent and competitive”. The board held “dozens” of calls and meetings with Paramount, including four in-person sessions between chief executive David Zaslav and the Ellisons. Despite repeated feedback, Paramount never submitted a proposal superior to Netflix’s. As for regulatory risk—Paramount’s supposed trump card—WBD sees no material difference between the two deals. Netflix has even ponied up a record-breaking $5.8 billion regulatory termination fee, topping Paramount’s $5  billion.

The message to shareholders is clear: don’t be tempted by Paramount’s siren song. This is one tender offer better left untended.