As Warner-Netflix Deal Races Ahead, Paramount Weighs Its Next Move | Analysis

The clock is ticking. Paramount CEO David Ellison’s quest to thwart Netflix’s $83 billion Warner Bros. deal faces a new hurdle and pressure to raise his bid after the streamer revised its deal to an all-cash offer and an accelerated shareholder vote on the deal. 

In addition to the all-cash gambit, Netflix and Warner Bros. Discovery on Tuesday chipped away at Paramount’s argument that its $30-a-share all-cash offer is superior. Warner Bros. Discovery shared more financial information about Discovery Global, including estimates for key assets like CNN, projected to generate $600 million in adjusted earnings this year. WBD said it believes the spinoff could be valued by as much as $6.86 a share, a dramatic difference from Ellison’s contention that the assets are essentially worthless. 

The actions force Paramount to decide quickly on its response. The company could continue pursuing its lawsuit against Warner Bros. and wage a proxy war to wrest control away from the board. Or it could wait it out and see if regulators block the Netflix deal. There’s also the option of raising Paramount’s bid, a move that many shareholders have called for but that Ellison has been reluctant to make.

Time isn’t on Paramount’s side with the revised deal setting up a shareholder vote by April, with the possibility it could come as early as next month. Ellison is expected to continue making his case, which includes the idea that it will be able to get through regulators faster, but experts believe that it’s time to sweeten the deal.   

GAMCO Investors chairman Mario Gabelli, who previously signaled he was likely to tender his shares to Paramount, said on Tuesday that Ellison needs to “fish or cut bait” and expects the company to increase its offer and extend the deadline on its tender offer. 

“Paramount will make another appeal to shareholders.” eMarketer senior analyst Ross Benes told TheWrap. “Unless Paramount raises its bid, the appeal will be window dressing.” 

Benes and other experts, however, believes Paramount will still take a measured approach despite the looming time crunch.

“By going all-cash at $27.75, Netflix removes two of Paramount’s biggest talking points: stock volatility and complexity. Shareholders no longer have to underwrite Netflix’s share price or debate collars and relative value — it becomes a straight cash comparison,” Qualia Legacy Advisors managing director Aaron Meyerson told TheWrap. “That said, because the price itself didn’t change, it doesn’t automatically flip the economics. On a pure dollars-per-share basis, $30 is still $30.”

“I don’t expect Paramount to raise their bid immediately,” Benes added. “Paramount has tried to derail the Netflix deal in numerous ways without ever raising its bid. Paramount seems set on its price for now.”

A spokesperson for Paramount declined to comment when asked about its potential next steps.

Option 1: Litigation and a proxy war

Ellison is suing Warner Bros. in the Delaware Court of Chancery and has already threatened to wage a proxy battle aimed at replacing WBD’s board of directors with its own slate of candidates to engage further with its offer.

Paramount also plans to propose an amendment to Warner’s bylaws that would require shareholder approval of the separation of Discovery Global, which is slated to take place in the next six to nine months. 

Similar to the tender offer, a proxy fight is time-consuming and victory is dependent upon rallying shareholder support. Experts previously told TheWrap that such a feat would face difficult odds of success and the accelerated timeline for a shareholder vote adds additional pressure. 

“Without Paramount increasing their offer, there’s no incentive for the shareholders to vote for the Paramount slate,” Corey Martin, managing partner of Granderson Des Rochers LLP’s entertainment finance practice, said. “It all boils down to money and if they want this company, they’re gonna have to blow the Netflix bid out of the water.”

Ellison’s $30 per share tender offer is set to expire Wednesday at 5 p.m. ET, though Paramount is expected to issue a second extension pushing back that deadline.

As of Dec. 19, less than 400,000 shares had validly tendered their shares, though some shareholders called Paramount’s $108.4 billion offer “superior,” including Warner Bros.’ seventh largest shareholder Pentwater Capital Management. (This was before Netflix’s revised all-cash bid.)

Option 2: Wait it out

Ellison could also sit tight and let the regulatory review process play out in the hopes that Netflix’s deal is blocked. But that process would likely take years, especially if there’s a legal challenge by regulators or state attorneys general, and may be concluded after the Discovery Global separation is completed. 

Both Paramount and Netflix are engaging with regulators, including the European Commission and Department of Justice. Netflix has said it expects a deal to close within 12 to 18 months from when its original agreement was announced, while Paramount has said a potential deal would close within a year. 

Paramount Chief Legal Officer Makan Delrahim has argued that the Netflix deal is anticompetitive and “presumptively unlawful” in a letter to House lawmakers, saying it would further cement the company’s dominance in streaming. Ellison has also been traveling overseas, trying to convince European regulators of the risks associated with a Netflix deal.

Netflix has over 325 million subscribers and accounted for 9% of the streaming category’s 47.5% share of TV viewership in the U.S. in December, per Nielsen. Meanwhile, WBD accounted for 1.4% of TV viewership for the month and has around 128 million streaming subscribers globally as of its latest earnings disclosure. Paramount+ and Pluto accounted for a combined 2.5% of TV viewership in December, with the former reporting around 79 million subscribers as of its latest disclosure.

“The Netflix-WBD agreement still faces what could be a protracted regulatory review and legal challenges from Paramount Skydance,” S&P Global analyst Seth Shafer told TheWrap. “Paramount Skydance’s hesitancy to raise its bid so far may speak more to its confidence that its existing offer could look better and better to WBD shareholders if the Netflix deal becomes mired down.”

During Netflix’s fourth quarter earnings call, Netflix co-CEO Greg Peters said the company is still under 10% of TV time in all major markets where it competes, a core argument as it tries to convince regulators that it’s not a TV giant.

“We’ve got hundreds of millions of households around the world still to sign up,” Peters said. “We’re just about 7% of the addressable market in terms of consumer and ad spend. So tons of room ahead of us.”

Netflix co-CEO Ted Sarandos added that the Warner Bros. deal will allow the company to significantly expand production capacity in the U.S., keep investing in original content long-term and offer more jobs and opportunities to creative talent.

“It’s got three core businesses that we don’t currently have. So we’re going to need those teams,” Sarandos added. “These folks have extensive experience and expertise. We want them to stay on and run those businesses. So we’re expanding content creation, not collapsing it in this transaction. “

Sarandos also pointed to growing competition in the market, from YouTube bidding on the Oscars and the NFL to Amazon owning MGM, Apple competing for the Emmys and Oscars and Instagram “coming next” with plans to bring its Reels offering to TVs.

But Delrahim argues Netflix’s regulatory defense is a “tortured and absurd definition of the market that no serious regulator would ever accept” and that comparisons to YouTube and social media have “no grounding in market or legal reality.”

“Netflix itself, until this deal, did not take that argument seriously, as Netflix co-CEO Ted Sarandos referred to YouTube as a ‘farm league’ for content creators, and omitted YouTube entirely from public securities filings in which it compared itself to actual competitors in streaming video on demand,” Delrahim wrote. “Netflix’s only remaining hope is to persuade the public and corporate board members that the Paramount deal is equally risky. That is flatly untrue. The Netflix proposed deal is presumptively unlawful. Paramount’s proposed deal is not.”

Option 3: A “best and final” offer

The final option would be submitting what Ellison has repeatedly referred to as his “best and final” offer. WBD board chairman Samuel Di Piazza Jr. has said the company would be “very open” to a deal with Paramount, but warned of “significant costs, risks and uncertainties” outside of the headline price tag that would have to be addressed. 

“I don’t see how anything below $33-35 range would be potentially perceived as a superior offer,” Paul Nary, an M&A and strategy professor at the Wharton School of the University of Pennsylvania, told TheWrap. “Even then, it is not uncommon for boards to reject challenger offers that have a higher headline price based on other factors.”

One hurdle with raising its bid is that Netflix has the opportunity to counter, though it’s unclear how high the streamer would be willing to go, especially as they’d be competing with the deep pockets of David’s father and Oracle co-founder Larry Ellison, the world’s fourth-richest man.

Nary noted that WBD stock was little changed following Netflix’s revised offer, signaling that “the market’s overall valuation of the current offer and the likelihood of a better one hasn’t really changed.” But he acknowledged that the outcome is difficult to predict.

“It is hard to do a deal when the two sides are hostile and not communicating,” Nary warned. “I’ve said it before and I’ll say it again: It will be harder for Paramount Skydance to have a chance at winning without a more constructive approach to WBD’s board, even with an improved bid.” 

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