Paramount WBD Tender Offer: Arguments For and Against

Hours ago Warner Bros. Discovery It agreed to sell the studio and its broadcast assets to… NetflixNetflix co-CEO Ted Sarandos called WBD CEO David Zaslav to inform him that Netflix would not make higher offers.

WBD contributors now have a chance to expose Sarandos’ bluff.

WBD shareholders have until January 21 to offer their shares to Paramount for $30 in cash, though that deadline may be artificial. Paramount could extend it until the WBD’s annual meeting, which has not yet been set but was held this year on June 2.

If Paramount acquires 51% of WBD’s outstanding shares, it will control the company, even though WBD’s board of directors has already approved the sale of 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 gauge whether they want to accept Paramount’s offer or adhere to the board’s recommendation to sell to Netflix.

To bid or not to bid, that is the question. There are sound arguments for both sides. The decision also introduces a game theory element for shareholders who may simply want a bidding war rather than be concerned with the right buyer.

There are two main reasons why a shareholder might offer his or her property to Paramount.

The first is if the investor believes Paramount’s $30 per share, all-cash offer for all of WBD is more valuable than Netflix’s $27.75 per share offer for the Warner Bros. movie studio. And HBO Max streaming works only. The second is the belief that a stock offering is the best way to force a bidding war between Netflix and Paramount.

A shareholder could decide Paramount’s current offer is better than Netflix’s if they believe it has a greater likelihood of receiving regulatory approval or if they believe Discovery Global — the group of linear cable networks including CNN, TNT, Discovery, HGTV and TBS that is slated to go on the show — will have little value as a publicly traded company.

Paramount Skydance CEO David Ellison told CNBC earlier this month that he values ​​Discovery Global at $1 per share, given his expectations of the likely multiple (twice its EBITDA) at which it will trade based on current valuations of similar linear cable networks. If WBD does not agree to sell the entire company to Paramount, it plans to spin off Discovery Global as its own publicly traded entity in mid-2026.

Paramount’s argument is that $30 per share is already greater than Netflix’s offer of $27.75 per share plus Discovery Global’s $1 per share.

Paramount’s offer is also all-cash, while Netflix’s offer includes a 16% stake with what’s called a collar, meaning shareholders won’t know exactly how much Netflix stock they’ll actually receive until the deal closes.

As for regulatory approval, Paramount has raised arguments that the combined streaming business of Netflix and HBO Max would be anti-competitive. Netflix has more than 300 million paying customers globally. The idea of ​​the largest streaming company buying HBO Max has already raised concerns from politicians, including President Donald Trump, who said there could be a “market share” issue with the Netflix deal.

While Paramount will combine Paramount+ with HBO Max, Paramount+ has about 80 million subscribers, presenting less of a risk to competition.

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

Ellison has already announced that Paramount’s offer of $30 per share is not the be-all and end-all. The tender could result in Netflix coming back with a higher offer, which could then prompt Paramount to raise its offer as well.

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

He added last week that while he had previously been tempted to float his shares for Paramount, “the most important part is keeping it afloat.”

In contrast, other shareholders may believe that not submitting bids is the best way to start a bidding war. If Paramount sees that it is not receiving shareholder interest as the annual meeting approaches, it may raise its offer to attract more shareholders.

There are additional reasons for not submitting bids. Shareholders may want to take a share of Netflix and Discovery Global stock from the Netflix offering.

In a WBD filing last week, the company said the mysterious “Corporation C” had proposed acquiring Discovery Global and its 20% stake in WBD’s broadcast and studio businesses for $25 billion in cash. This offer was rejected by the WBD Board of Directors as “unworkable”.

However, the vague bid suggests there could be a buyer interested in all of Discovery Global if it were spun off, which could result in much more than $1 a 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 offer much more valuable than Paramount’s.

Ensuring Discovery Global’s WBD split is also a safe place for shareholders in the event regulators block the Paramount-WBD merger, Greenfield said. Since the Paramount deal is for all of WBD’s businesses, including CNN, Ellison’s bid — which includes nearly $24 billion from Middle East sovereign wealth funds — could face regulatory and political hurdles, Greenfield noted.

“You want division to happen,” Greenfield said in an interview. “If the Paramount deal doesn’t get regulatory approval, you’ve now prevented the split from happening. You’re stuck in 2027 with cable networks in decline, and you haven’t spun them off. Does the US really want a company funded by more money from the Middle East than the Ellison family owns CNN?”

WBD’s board said one reason for rejecting Paramount’s $30-a-share offer was its concern about financing, noting that the financing comes more from Middle Eastern sovereign wealth funds than from the Ellison family, which has pledged about $12 billion.

Paramount changed the terms of its deal on Monday to help address financing concerns. Oracle founder Larry Ellison, David’s father and one of the five richest people in the world, has agreed to provide “an irrevocable personal guarantee of $40.4 billion in equity financing for the offering and any damages claims against Paramount” if the current financing fails, Paramount said in a statement.

Paramount also said Monday that it would release records confirming that the Ellison Family Trust “owns approximately 1.16 billion shares of Oracle common stock and that all material liabilities of the Ellison Family Trust are publicly disclosed.” Paramount said the Family Trust Fund will support the financing. The WBD board had previously argued that the fund was a “murky entity”, preferring a direct commitment from Ellisons.

Notably, even with Monday’s announcement, the Ellison family has not increased its personal equity investments, which still stand at $12 billion. Internally, some WBD executives cited Carl Reiner’s 1970 film “Where’s Bubba?” When talking about giving, according to a person familiar with the matter. WBD has prompted the Ellisons to commit more personal funds to the deal.

However, a WBD shareholder may not care where the funding comes from as long as it exists. The three sovereign wealth funds participating in the deal are the Saudi Public Investment Fund, Limad Holding Company in Abu Dhabi, and the Qatar Investment Authority. The Public Investment Fund and the Qatar Investment Authority, in particular, are two well-known institutions that have contributed billions of dollars to other deals in the United States.

Correction: This story has been revised to correct that Warner Bros. shareholders Discovery has until January 21 to offer their shares to Paramount for $30 in cash. An earlier version missed this deadline.