Paramount WBD tender offer: Arguments for and against

hours ago Warner Bros. discovery agreed to sell its studio and broadcast assets netflixNetflix co-CEO Ted Sarandos called WBD CEO David Zaslav to inform him that Netflix would not bid higher.

WBD shareholders now have a chance to call Sarandos’ bluff.

WBD shareholders have until Jan. 21 to offer their shares to Paramount for $30 in cash, but that deadline may be artificial. Paramount may extend this to WBD’s annual meeting, which has yet to be determined but takes place on June 2 this year.

If Paramount buys 51% of the outstanding WBD shares, it would take control of the company, even though WBD’s board has already agreed to sell the company’s studio and streaming assets to Netflix. Both Netflix and Paramount could use the coming days and weeks to talk with WBD shareholders to determine whether they want to accept Paramount’s offer or stick with the board’s recommendation to sell to Netflix.

To tender or not to tender, that is the question. Both sides have solid arguments. The decision also introduces a game theory element for shareholders who just want a bidding war rather than caring about the right buyer.

There are two general reasons why a shareholder might tender assets to Paramount.

First, if the investor were to accept Paramount’s $30 per share cash offer for all of WBD, Netflix would only buy Warner Bros. if he believes it’s worth more than his $27.75 per share offer for the movie studio and HBO Max streaming business. Second, the belief that stock auctions are the best way to force a bidding war between Netflix and Paramount.

A shareholder might decide that Paramount’s current offer is better than Netflix’s if he thinks it’s more likely to be approved by the regulator or if he believes Discovery Global, the planned launch of a portfolio of linear cable networks that includes CNN, TNT, Discovery, HGTV and TBS, would have minimal value as a public company.

David Ellison, CEO of Paramount Skydance He told CNBC earlier this month that he values ​​Discovery Global at $1 per share, given his estimate of the likely multiple (2x earnings before interest, taxes, depreciation and amortization) it would trade at based on current valuations for similar linear cable networks. Unless WBD agrees to sell the entire company to Paramount, it plans to spin off Discovery Global as its own publicly traded entity in mid-2026.

As for regulatory approval, Paramount has cited arguments that the combination of Netflix and its HBO Max streaming business would be anti-competitive. Netflix has more than 300 million paying customers worldwide. The idea of ​​the largest streamer buying HBO Max has raised concerns from politicians, including President Donald Trump. who said There may be a “market share” issue in the Netflix deal.

Although Paramount will combine Paramount+ with HBO Max, Paramount+ has approximately 80 million subscribers, making it less of a competitive risk.

The second, more subtle argument for bidding is to maximize upside even if the assets ultimately go to Netflix.

Ellison has already stated that Paramount’s offer of $30 per share is not the best and final. The bidding could result in Netflix coming back with a higher bid, which could prompt Paramount to increase its bid.

“The idea of ​​Company A and Company B having a bidding war; that’s what we like as part of the free market system,” Mario Gabelli, chairman and CEO of GAMCO Investors, told CNBC earlier this month.

He added last week that he had previously been open to tendering his shares to Paramount, but “the most important part is keeping it in the game.”

Other shareholders, in contrast, may believe that not bidding is the best way to start a bidding war. If Paramount sees no interest from shareholders as the annual meeting approaches, it could increase its offer to attract more shareholders to participate.

There are other reasons for not tendering. Shareholders may want the Netflix and Discovery Global equity portion of the Netflix offering.

In a filing to WBD last week, the company said a mysterious “Corporation C” has offered to buy Discovery Global and its 20% stake in WBD’s broadcast and studio businesses for $25 billion in cash. This proposal was rejected by the WBD board of directors as “non-actionable”.

The mystery offer suggests there could be a buyer interested in all of Discovery Global’s shares if it is spun off, which could yield much more than $1 per share, according to Rich Greenfield, an analyst at LightShed Partners. That’s a good reason not to bid, he said, because it makes Netflix’s bid much more valuable than Paramount’s bid.

Greenfield said splitting Discovery Global from WBD is also a safe play for shareholders in case regulators block the Paramount-WBD merger. Greenfield noted that Ellison’s bid — including about $24 billion in Middle East government funds — could face regulatory and political hurdles because the Paramount deal includes all of WBD, including CNN.

“You want the split to happen,” Greenfield said in an interview. “If the Paramount deal doesn’t get regulatory approval, you’ve prevented the split from happening. You’ve been faced with declining cable networks in 2027 and you haven’t canceled them. Does the United States really want a company financed by more Middle Eastern money rather than money from the Ellisons, who own CNN?”

extraordinary He changed the terms of the deal on Monday to help address concerns about financing. Oracle founder Larry Ellison, David’s father and five richest people in the worldagreed to provide “$40.4 billion in equity financing for the offering and an irrevocable personal guarantee in the amount of any claims against Paramount” should existing financing fail, Paramount he said in a statement.

Paramount also said Monday it would release records confirming that the Ellison family foundation “owns approximately 1.16 billion shares of Oracle stock and that all material liabilities of the Ellison family foundation have been publicly disclosed.” Paramount said the family foundation would support the financing. WBD’s board had previously argued that the trust was a “transparent entity” and preferred a direct commitment from the Ellisons.

It is noteworthy that despite Monday’s announcement, the Ellisons did not increase their personal capital investments, which still stand at $12 billion. Internally, some WBD executives cited the 1970 Carl Reiner film “Where’s the father?” speaking about the proposal, according to a person familiar with the matter. WBD forced the Ellisons to commit more personal money to the deal.

Still, a WBD shareholder may not care where the fund comes from, as long as it’s there. The three SWFs involved in the deal are Saudi Arabia’s Public Investment Fund (PIF), Abu Dhabi’s L’imad Holding Company and Qatar Investment Authority (QIA). PIF and QIA, in particular, are well-known institutions that contribute billions of dollars to other US-based deals.

Correction: This story was published by Warner Bros. It was revised to reflect that Discovery shareholders must tender their shares to Paramount for $30 in cash by January 21. In a previous version, this deadline was stated incorrectly.