The battle over Warner Bros. Discovery may hinge on trust issues.
The Warner Bros. Discovery board of directors on Wednesday unanimously recommended that its shareholders reject a hostile takeover bid by Paramount Skydance, saying that the $30/share bid for the entirety of the company was inferior to the winning Netflix bid of $28/share for the streaming and studios division.
Saying that it had offered “clear, and oft-repeated, feedback” to Paramount on its six previous proposals — a rebuttal to Paramount’s claim that WBD had failed to adequately engage on any of them — WBD said the Paramount bid is “inadequate” and carries “significant risks and costs.” Specifically, it contrasted Paramount’s “illusory” bid, dependent in large measure on an “unknown and opaque revocable trust,” with the certainty offered by Netflix, “a binding agreement with enforceable commitments, with no need for any equity financing and robust debt commitments.”
It also contrasted the general health of Netflix — “a public company with a market cap in excess of $400 billion with an investment grade balance sheet” — with that of Paramount, “a $15 billion market cap company with a credit rating at or only a notch above ‘junk’ status.”
Paramount, WBD said, would be laden with debt and have virtually no free cash flow before exploiting the various “synergies” between the two companies. At a target figure of $9 billion — higher than the $6 billion Paramount has touted publicly — WBD described those synergies as “ambitious” and said they would “make Hollywood weaker.”
WBD would also be on the hook for a combined $4.3 billion if the Netflix bid does not go through, between a $2.8 billion termination fee owed Netflix and $1.5 billion in financing costs it would incur if it does not go forward with its planned spinoff of its linear cable platforms.
Paramount issued a statement Wednesday disputing the WBD characterization of its bid and the trust, which it noted is “well-capitalized,” long-established and backed “by one of the most well-known founders and entrepreneurs in the world, Larry Ellison.” But it did not address the key complaint in the WBD letter, namely that because conditions can be changed and assets moved at any time, revocable trusts are by their nature “no replacement for a secured commitment by a controlling stockholder.” WBD said it was seeking “a full and unconditional financing commitment from the Ellison family,” noting their “ample resources.”
In its letter, Paramount again disputed the value of the “global networks” business that will be spun off into an independent entity ahead of the Netflix transaction. The would-be “Discovery Global” business will consist of the WBD linear networks, including the TNT Sports networks of TNT, TBS and truTV, as well as a 20 percent stake in the streaming and studios division (which is set to be renamed “Warner Bros.”). The valuation of Discovery Global will help determine which of the two bids is of greater value.
WBD said in its letter that the Netflix bid is the better offer because it combines cash, shares in Netflix common stock and shares in Discovery Global, but it did not enumerate the value of those Discovery Global shares. Paramount believes they are worth $1/share, which would make the Netflix bid slightly lower than the $30/share it is bidding for the full company.
Notably, WBD said in an SEC filing that a previously unknown bidder — an unnamed “American media company” — had been looking to buy Discovery Global and its one-fifth stake in Warner Bros. for $25 billion in cash.
WBD was the second major media conglomerate to reject a takeover bid in as many days, as Scripps on Tuesday rejected an unsolicited bid by Sinclair Broadcasting.
