Warner Bros. sticks with Netflix merger, calls Paramount’s $108B bid “illusory”

Larry Ellison pledged $40B, but “he didn’t raise the price,” Warner chair says.

The Warner Bros. Discovery board has unanimously voted to rebuff Paramount’s $108.4 billion offer and urged shareholders to reject the hostile takeover bid. The board is continuing to support Netflix’s pending $82.7 billion purchase of its streaming and movie studios businesses along with a separate spinoff of the Warner Bros. cable TV division.

Warner Bros. called the Paramount bid “illusory” in a presentation for shareholders today, saying the offer requires an “extraordinary amount of debt financing” and other terms that make it less likely to be completed than a Netflix merger. It would be the largest leveraged buyout ever, “with $87B of total pro forma gross debt,” and is “effectively a one-sided option for PSKY [Paramount Skydance] as the offer can be terminated or amended by PSKY at any time,” Warner Bros. said.

The Warner Bros. presentation touted Netflix’s financial strength while saying that Paramount “is a $14B market cap company with a ‘junk’ credit rating, negative free cash flows, significant fixed financial obligations, and a high degree of dependency on its linear business.” The Paramount “offer is illusory as it cannot be completed before it is currently scheduled to expire,” Warner Bros. said.

Warner Bros. said in a letter to shareholders today that it prefers Netflix with its “market capitalization of approximately $400 billion, an investment grade balance sheet, an A/A3 credit rating and estimated free cash flow of more than $12 billion for 2026.” Moreover, the deal with Netflix provides Warner Bros. with “more flexibility to operate in a normal course until closing,” the letter said.

Even if Paramount is able to complete a deal, “WBD stockholders will not receive cash for 12-18 months and you cannot trade your shares while shares are tendered,” the board told investors. Despite the seemingly firm position, Warner Bros. Discovery board Chairman Samuel Di Piazza Jr. seemed to suggest in an appearance on CNBC’s Squawk Box today that the board could be swayed by a higher offer.

On December 5, after a bidding war that also involved Paramount and Comcast, Warner Bros. struck a deal to sell Netflix its streaming and movie studios businesses. Netflix, already the world’s largest streaming service, would become an even bigger juggernaut if it completes the takeover including rival HBO Max, WB Studios, and other assets.

While the Paramount bid is higher, it would involve the purchase of more Warner Bros. assets than the deal with Netflix. “Unlike Netflix, Paramount is seeking to buy the company’s legacy television and cable assets such as CNN, TNT, and Discovery Channel,” the Financial Times wrote. “Netflix plans to acquire WBD after it spins off its cable TV business, which is scheduled to happen this year.”

Paramount, which recently completed an $8 billion merger with Skydance, submitted its bid for a hostile takeover days after the Netflix/Warner Bros. deal was announced. Warner Bros. resisted, and Paramount amended its offer on December 22 to address objections.

“Larry Ellison has agreed to provide an irrevocable personal guarantee of $40.4 billion of the equity financing for the offer and any damages claims against Paramount,” Paramount said. It also said it offered “improved flexibility to WBD on debt refinancing transactions, representations and interim operating covenants.”

Larry Ellison’s son, David Ellison, is the chairman and CEO of Paramount Skydance. In his CNBC appearance, Di Piazza acknowledged that “Larry Ellison stepped up to the table and the board recognizes what he did.” But “ultimately, he didn’t raise the price. So, in our perspective, Netflix continues to be the superior offer, a clear path to closing.”

Warner Bros. shareholders currently have a January 21 deadline for tendering shares under the Paramount offer, but that could change, as Paramount has indicated it could sweeten the deal further.

Warner Bros. said in the letter to shareholders today that the latest offer still isn’t good enough. Paramount is “attempting an acquisition requiring $94.65 billion of debt and equity financing, nearly seven times its total market capitalization,” requiring it “to incur an extraordinary amount of incremental debt—more than $50 billion—through arrangements with multiple financing partners,” the letter said.

Warner Bros. said that breaking the deal with Netflix would require it to pay Netflix a $2.8 billion termination fee. Either Paramount or Netflix would have to pay Warner Bros. a $5.8 billion termination fee if the buyer can’t get regulatory approval for a merger. But if a Paramount deal failed, there would also be $4.7 billion in unreimbursed costs for shareholders, reducing the effective termination fee to $1.1 billion, according to Warner Bros.

“In the large majority of cases, when an overbidder comes in, they take that break[up] fee and pay it,” Di Piazza said on CNBC.

Warner Bros. Discovery also said the Paramount offer would prohibit it from completing its planned separation of Discovery Global and Warner Bros., which it argues will bring substantial benefits to shareholders by letting each of the separated entities “focus on its own strategic plan.” This separation can be completed even if Netflix is unable to complete the merger for regulatory reasons, it said.

We contacted Paramount and will update this article if it provides any response.

Warner Bros. is facing pressure from one of its top shareholders to negotiate further with Paramount. “Pentwater Capital Management, a hedge-fund manager that is among Warner’s top shareholders, told the board in a letter Wednesday that it is failing in its fiduciary duty to shareholders by not engaging in discussions with Paramount,” according to The Wall Street Journal.

The hedge-fund manager said the board should at least ask Paramount what improvements it is willing to make to its offer. “Pentwater vowed to vote against the merger and not support the renomination of directors in the future if Paramount raises its offer and Warner’s board doesn’t have further discussions with the company,” the Journal wrote.

The Warner Bros. board argued in its letter that “PSKY has continued to submit offers that still include many of the deficiencies we previously repeatedly identified to PSKY, none of which are present in the Netflix merger agreement, all while asserting that its offers do not represent its ‘best and final’ proposal.”

However, Di Piazza suggested on CNBC that Paramount could still put a superior offer on the table. “They had that opportunity in the seventh proposal, the eighth proposal, and they haven’t done it,” he said. “And so from our perspective, they’ve got to put something on the table that is compelling and is superior.”

Netflix issued a statement today saying it “is engaging with competition authorities, including the US Department of Justice and European Commission,” to move the deal forward. “As previously disclosed, the transaction is expected to close in 12-18 months from the date that Netflix and WBD originally entered into their merger agreement,” Netflix said.