Warner Bros.: Advises shareholders to reject Paramount's "inferior" acquisition, board unanimously supports Netflix's proposal

Warner Bros. Discovery is facing a rare bidding war in Hollywood history, with the board recommending shareholders reject Paramount Global's hostile takeover offer and stick to the original Netflix acquisition plan. This competition will determine the ownership of iconic assets such as HBO and CNN.

The Warner Bros. board clearly stated in a letter to shareholders on Wednesday that Paramount's all-cash offer of $30 per share is "subpar" and "undervalued." Paramount's acquisition plan includes all assets under Warner Bros., including cable networks. In contrast, the Netflix proposal only acquires the streaming and film studio business, with Warner Bros. shareholders receiving $27.75 per share in cash and Netflix stock, as well as equity in the spun-off cable network company.

The board raised serious concerns about the financing security of Paramount, stating that the $40.7 billion equity commitment from software billionaire Larry Ellison's family is backed by "an opaque revocable trust," and the related documents "contain loopholes and restrictions that pose risks to shareholders and the company." The Paramount plan would also require Warner Bros. to pay Netflix a $2.8 billion breakup fee.

This bidding war highlights the intensity of asset consolidation in Hollywood during the streaming era, while also raising concerns among regulators and the industry about further industry concentration. Regardless of which side ultimately prevails, the deal will face months of regulatory scrutiny.

Paramount Appeals Directly to Shareholders

After the Warner Bros. board reached an agreement with Netflix, Paramount launched a takeover bid directly to Warner Bros. shareholders. Paramount is currently controlled by Larry Ellison and his son David Ellison, and is competing with Netflix, the world's most valuable entertainment company, for one of Hollywood's most historic studios and the jewel of its television business, HBO.

According to regulatory documents, Paramount CEO David Ellison first proposed the acquisition during a meeting with Warner Bros. CEO David Zaslav on September 14. Although the board rejected the initial offer, Ellison made two subsequent bids within the following month, sparking interest from Netflix, Comcast, and other unnamed parties.

Executives from both Paramount and Netflix have stated that they would be the best buyers, capable of leveraging Warner Bros.' valuable content library to boost their respective streaming businesses.

Board Questions Financing Reliability

The Warner Bros. board raised multiple concerns about Paramount's acquisition offer, with core issues focusing on the uncertainty of financing and the risk that Paramount could terminate the deal at any time. The board stated that the Ellison family failed to adequately support its $40.7 billion equity commitment, which is backed by "an unknown and opaque revocable trust."

The board noted in the letter that the documents provided by Paramount "contain loopholes, defects, and restrictions." The offer also imposed numerous restrictions on Warner Bros., including limitations on its debt refinancing capabilities.

Including the assumption of debt, Paramount's valuation of Warner Bros. is $108.4 billion. The Netflix proposal values the assets it seeks to acquire at approximately $82.7 billion, and Warner Bros. investors will also benefit from the proceeds of the cable network spin-off. Some shareholders, including fund manager Mario Gabelli, support a competitive auction for Warner Bros., believing that both Paramount and Netflix may raise their bids

Controversy Arises from the Bidding Process

David Ellison criticizes the bidding process, accusing Warner Bros. of unfairly favoring Netflix. However, Warner Bros. describes the Ellison family as aggressive and disorganized. The company claims that Ellison submitted his bid after the deadline, failed to address many concerns, and employed a strategy of threats and persuasion against the management.

Warner Bros. stated that the company repeatedly expressed concerns about the lack of evidence regarding the Ellison family's ability to support the deal. In contrast, Netflix addressed every concern raised by the board.

The board unanimously recommended the Netflix proposal, stating that "the terms of the Netflix merger are superior," while the Paramount offer "provides insufficient value and imposes numerous significant risks and costs." The board also noted that the cost-cutting proposed by Paramount "would make Hollywood weaker rather than stronger."

Sources of Financing and Regulatory Challenges

Ellison's latest bid includes $11.8 billion from the Ellison family, $24 billion from three Middle Eastern sovereign wealth funds, and additional financing from RedBird Capital Partners. On Tuesday, Affinity Partners, an investment firm founded by Jared Kushner, son-in-law of former President Trump, withdrew from the bidding process.

Both acquisition proposals have raised concerns in Hollywood about the impact of further industry consolidation and have drawn criticism from various political factions. Any deal with either party would trigger months of regulatory scrutiny. Although Paramount insists that its proposal is most likely to receive regulatory approval, Warner Bros. contends that it believes Netflix and Paramount are on equal footing in terms of regulatory scrutiny