Paramount letter questions Warner Bros. Discovery sale process

Dear Mr. Zaslav: On behalf of Paramount Skydance Corporation (“Paramount”, “we” or “we”), Warner Bros. We are writing to express our serious concerns about the fairness and adequacy of the bidding process for a potential merger with Discovery (“WBD” or “you”). It has become increasingly clear through media coverage and other reporting that WBD has abandoned the appearance and reality of a fair transaction process, thereby abdicating its duties to shareholders and engaging in a myopic process with a predetermined outcome in favor of a single bidder. We specifically request and expect this letter to be shared and discussed with WBD’s entire board of directors.

Recently, we have witnessed news that caused serious concern in the US and foreign media. German newspaper Handelsblatt recently reported on a meeting reportedly held in Brussels between WBD’s Head of International Business, Gerhard Zieler, and EU Commission Vice-President Hena Virkkunen, who reports directly to WBD’s Chief Executive, “who arrived with a team of three people” to discuss potential merger possibilities. In this meeting, the article reports that “concerns were expressed that the Ellison family’s planned acquisition of Warner Bros. Discovery could lead to excessive media concentration” and that the EU Commission would therefore consider intervening in a possible merger with Paramount. The article quotes “sources close” to Zeiler as saying, “The talks with the Commission are important because both Warner and the EU want to preserve media diversity.” The consequences of such a meeting, if it took place, are clear and clearly reveal a tacit resistance to, if not active sabotage of, a Paramount proposal.

While this report is concerning in itself, it is not an isolated report of WBD’s alleged resistance to the combination with Paramount. Several US media outlets reported WBD management’s excitement about a transaction with Netflix and management’s statements that a transaction between WBD and Netflix would be a “slam dunk”, while also referring to Paramount’s offer in a negative light. Additional reports since the revised proposals were submitted on December 1 have indicated that WBD’s “board of directors is actually receptive to a transaction with Netflix” due to the “chemistry” between WBD management and Netflix management. We have come to you primarily to find out whether this report is accurate and to have a productive discussion with you about the real or perceived issues it may reflect.

Moreover, these media reports reflect similar indicators we have heard throughout this process, even though we believe our discussions with WBD leaders have been productive in other respects. Paramount has a credible basis to believe that the sales process was impaired by management conflicts, including the potential self-interest of some members of management in post-transaction roles and fees paid as a result of economic incentives included in recent changes to employment regulations. These concerns are further strengthened by indications of managerial bias and indebtedness to others whose interests are not aligned with those of shareholders, and by the fact that alternatives involving only certain WBD assets are prioritized despite high regulatory risks and the potential to deprive shareholders of consideration of the full enterprise value of WBD.

Additionally, as you know, Paramount agreed to certain standstill arrangements in exchange for the opportunity to participate in a truly competitive and impartial bidding process. Paramount did not negotiate for WBD to intentionally or unintentionally encourage a skewed and unfair process. We believe that all parties to this process should have a common desire for a seamless transaction process and will mutually benefit from it. Even if we discount the veracity of any media reports, which we assume you agree with, the mere discovery of a flawed process would jeopardize any potential transaction that might result and could undermine potential value maximization for WBD shareholders from any potential transaction.

In light of our serious concerns about the integrity of WBD’s process, we seek confirmation of whether WBD has appointed an independent special committee of impartial members of the board to evaluate potential transaction opportunities and make a final decision on the sale or spin-off of all or part of the company. Otherwise, we strongly recommend authorizing such a special committee consisting of directors who do not have the potential to appear biased or beholden to others whose interests may differ from those of shareholders. This appears to be an important step at this stage to ensure the fairness and seamlessness of the transaction process and to maximize the value of the outcome that WBD decides to pursue. By engaging with WBD throughout this process, we have been encouraged by the tremendous potential of our organizations coming together. We are confident that the Paramount offer will deliver maximum value to WBD shareholders and we look forward to the opportunity to continue to work productively with you throughout this process. But at this point, we must insist on safeguards and steps being taken to ensure a truly fair and independent process is conducted for the benefit of both Paramount and WBD shareholders.