Warner Bros. Discovery rejected the latest takeover bid from Paramount Skydance — the latter’s seventh straight overture — citing uncertainties around the debt financing tied to the offer as WBD continued to tout its merger deal with Netflix.
In a Wednesday statement, the owner of Warner Bros., HBO and CNN claimed that Paramount Skydance — run by David Ellison and his mega billionaire father Larry Ellison — is attempting to launch “the largest LBO in history,” with so much debt tied to their $78 billion, all-cash offer that they may not be able to complete the deal.
Instead, the company’s board instead unanimously recommended that investors approve the board’s agreement to accept streaming giant Netflix’s $72 billion, $27.75-a-share bid for its Warner Bros. studio and HBO Max streaming service.
“They’re not listening to us — they still haven’t agreed to what Netflix has and won’t pay the breakup fee — and where is the higher price?” a senior official executive at WBD told The Post. “Plus we need certainty of closing. Will the banks really give them all that debt and will their bankers get them the money?”
The cash-and-stock Netflix deal, combined with an estimated $3 a share generated from a separate sale of the company’s cable properties — known as Discovery Global — remains superior to what the Ellisons are proposing, WBD’s board argued.
The WBD official added: “Larry has only guaranteed the equity if he guarantees the debt — boom, it’s yours. Could you imagine if they don’t come up with the money on a declining business with cord cutting? Shareholders will say you had a deal with Netflix … what did you guys do?”
Paramount Skydance didn’t immediately respond to requests for comment.
A banker close to Paramount Skydance said its unclear if PSKY will officially respond, but said WBD’s rejection letter was “expected” and “business as usual” and said PSKY will continue its appeal directly to WBD’s shareholders.
The game plan is to show that the Netflix deal faces insurmountable regulatory hurdles to combine the No. 1 and No. 3 streaming services. They will also argue that the cash portion is on shaky grounds given Comcast’s flopped spinoff of its cable assets this week under a new company called Versant.
Netflix has its own balance sheet issues, PSKY bankers argue: The streaming giant has shed $160 billion in market cap during the WBD bidding war and its deal is also heavily dependent on debt.
While weighing a higher bid is always a possibility, PSKY still believes its all cash offer is superior, the source said. The banker added that said the notion that PSKY can’t raise the $85 billion in debt is “absurd because we have commitments from two of the pillars of capitalism, BofA and Citi.”
Typically, LBOs are generally defined as debt-financed takeovers of companies by private-equity firms, whereas the Paramount Skydance deal is a publicly traded company and would be considered a strategic merger in banker parlance.
Nevertheless, WBD doubled down on the LBO rhetoric.
“The extraordinary amount of debt financing in the PSKY offer…the transaction PSKY is proposing is in effect a leveraged buyout,” WBD chairman Samuel A. Di Piazza said in a statement. “In fact it would be the largest LBO in history with $87 billion of total pro forma gross debt.”
The latest twist in the deal saga puts pressure on Paramount Skydance to possibly increase its offer beyond $30 a share in cash — or, as The Post has reported, opt for what is known internally as the “Defcon 1” strategy.
That could include suing WBD for allegedly ignoring what it believes is a more shareholder friendly deal and imposing a rigged deal process that favored Netflix from the start because of the friendship of WBD CEO David Zaslav and Netflix chief Ted Sarandos.
WBD in its various responses to Paramount Skydance has denied such accusations.
The banker said the LBO charge is a “smear,” ignoring how debt has been used in many of the largest such deals and Netflix relies on it for its transaction adding that to deny the deal because of the use of debt could violate what’s known as “Revlon” or the so-called Revlon Rule imposed by the Delaware Chancery Court that governs M&A transactions. It requires a board when considering a bid to “prioritize” shareholder value, thus it could be used in PSKY’s possible Defcon1 litigation strategy.
As reported by The Post, famed value investor Mario Gabelli, who’s financial company GAMCO Investors holds WBD stock, is siding with the Ellisons in their now hostile attempt to convince shareholders to reject Netflix and sign up with their offer.
The first deadline of their tender is Jan. 21.
Paramount, meanwhile, could also walk away from the process, begun in September when David Ellison made a $19-a-share cash-and-stock offer for WBD, and hope the regulatory challenges of the Netflix deal prevents the closing. Its transaction combines the No. 1 and No. 3 streaming services and is sure to get review from the DOJ’s antitrust department.
The Ellisons with their partners at RedBird Capital have been arguing that Netflix’s cash-stock deal is mired in uncertainties including, as The Post reported, significant value from the cable-spin off of CNN, TNT and the Discovery Network.
They say this week’s poor showing of Comcast’s spinoff of its cable properties, CNBC, MS NOW and other stations, which has far less debt, is proof the value of the deal could push the over payout to shareholders far lower than its $30 a share bid.
The Ellisons and RedBird recently sweetened their offer for the company, including a personal guarantee by Larry Ellison, the Oracle co-founder worth approximately $240 billion to make good on its bid. WBD, however, in its latest response to the Ellisons, said the latest volley failed to address cost concerns with its deal including billions of fees that would be incurred to complete the Netflix transaction.
It also doubled down on its contention that the cable-properties spin out means “WBD shareholders will receive value through their ownership of Discovery Global which will have considerable scale, a diverse global footprint and leading sports and news assets.”
So-called LBOs have are acquisitions that are financed by high levels of debt made popular during the 1980s buyout craze but have received criticism from investors because the of the pressure it puts on the new company to make bondholder payments while growing the business.
LBOs were cited a reason for so many of the companies caught up in the craze failed during those years, though its was used by many the eras best financiers, including CNN founder Ted Turner in his various media acquisitions.
WBD is the holding company for cable properties like CNN, Discovery, TNT but also the top ranked Warner Studio and HBO Max streaming service.
This story originally appeared on NYPost
