Warner Bros. Discovery urged shareholders to reject Paramount's offer, deeming it inferior to Netflix's deal. Photo / Getty Images
Warner Bros Discovery Inc has determined that an amended takeover offer from Paramount Skydance Corp is inferior to the deal it already has in place with Netflix Inc and urged its shareholders not to tender their shares to the interloper.
The media company’s board of directors said in a letter to shareholders on Wednesday that Paramount’s offer provides insufficient value and that it has doubts that Paramount will be able to close the deal. Paramount had put forth a revised offer on December 22 that reiterated a plan to buy shares at US$30 apiece but included a higher break-up fee and an assurance from billionaire Larry Ellison that he would personally guarantee US$40.4 billion ($69.8b) in equity financing backing the deal.
The Warner Bros board reiterated concerns about the more than US$50b of borrowing required in the Paramount deal, branding it the largest leveraged buyout in history.
“The extraordinary amount of debt financing as well as other terms of the PSKY offer heighten the risk of failure to close, particularly when compared to the certainty of the Netflix merger,” the company said. “Changes in the performance or financial condition of either the target or acquiror, as well as changes in the industry or financing landscapes, could jeopardise these financing arrangements.”
The board said the proposal continues to impose restrictions on Warner Bros’ ability to operate before a deal closes, such as a limit on entering into technology infrastructure contracts valued at more than US$30m a year, according to the letter. Those could “damage” Warner Bros’ business in the 12 to 18 months before the deal closes and give Paramount cover to abandon the deal in the interim, it said.
It would cost Warner Bros US$4.7b to terminate its agreement with Netflix in favour of a Paramount deal, the board said in the letter. That includes a US$2.8b breakup fee that Warner Bros would owe to Netflix, a US$1.5b fee for failing to complete a debt exchange and additional borrowing expenses of about US$350m, according to the letter. That would leave it with only US$1.1b of the US$5.8b termination fee offered by Paramount in the event the deal fell apart.
Warner Bros shares fell less than 1% in early trading in New York to US$28.29. Paramount shares were little changed.
Paramount, which is controlled by Oracle chairman Larry Ellison and his son David, has been trying for months to acquire Warner Bros, the parent of HBO and its namesake film and TV studios. A series of offers from Paramount prompted the company to put itself up for sale in October. Warner Bros announced a deal to sell its studios and streaming business to Netflix on December 5 for cash and stock worth US$27.75 a share. Warner Bros plans to spin off its cable-TV networks to shareholders before the sale to Netflix closes.
After Paramount lost, it took its offer directly to shareholders, offering to tender their shares for US$30 each in cash.
Paramount has argued that its offer for the entire company is superior to that of Netflix, and more likely to win regulatory approval. Warner Bros has said it thinks both deals have an equal shot at clearing regulatory hurdles.
Netflix said on Wednesday that it has already submitted its regulatory filing and is engaging with antitrust authorities, including the US Department of Justice and the European Commission.
“Netflix remains committed to working closely with WBD, regulators, and all stakeholders to ensure a smooth and successful transaction,” the company said in a statement.
Much of the debate has focused on the value of Warner Bros cable networks like TNT and CNN, which have been losing viewers and advertisers as consumers shift to streaming. Paramount believes the networks are worth about US$1 a share, while analysts say it may be worth more than that. The lower you value the cable assets, the greater advantage Paramount’s bid has. If shareholders believe the cable operations are more highly valued, then Netflix’s bid, which assumes they will be spun off, means investors get a bigger overall sum of money.
In its letter, the Warner Bros board said investors will receive more value from the cable-TV spinoff and Netflix shares under the current deal than from a Paramount deal.
“Your board negotiated a merger with Netflix that maximises value while mitigating downside risks, and we unanimously believe the Netflix merger is in your best interest,” the letter reads.
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