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Warner Bros. Discovery Board Rejects Paramount Skydance Bid, Recommends Netflix Offer

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Warner Bros. Discovery Rejects Paramount Skydance Bid, Recommends Netflix Deal for Film & Streaming

Warner Bros. Discovery (WBD) has advised its shareholders to reject a $108.4 billion takeover bid from Paramount Skydance. Instead, the WBD board has unanimously recommended a $72 billion agreement with Netflix for its film and streaming businesses. This decision follows a competitive bidding process initiated by WBD in October, drawing proposals that differ in scope, valuation, and potential regulatory implications, leading to an ongoing acquisition contest for parts or the entirety of the entertainment company.

Background to Acquisition Efforts

Warner Bros. Discovery initiated a sale process in October after receiving expressions of interest from multiple potential buyers, including Paramount Skydance. On December 5, WBD announced an agreement to sell its film and streaming operations to Netflix. Subsequently, Paramount Skydance submitted an unsolicited takeover bid directly to WBD shareholders.

Warner Bros. Discovery Board's Decision

The WBD board of directors unanimously recommended that shareholders reject Paramount Skydance's offer. In a legal filing, the board cited "numerous and significant risks" associated with Paramount's proposal and rejected assertions regarding substantial financial support from the Ellison family for the bid.

The board stated that Netflix's agreement is a "compelling value" with a "clear path to closing" and includes "protections for our shareholders," deeming it to be in the firm's best interests.

Paramount Skydance has stated that its offers do not represent its "best and final" proposal.

Details of Netflix's Proposal

Netflix's proposal is for the acquisition of specific WBD assets, including its movie studio, HBO, HBO Max streaming service, content library (such as Harry Potter and Game of Thrones franchises), and games division. This deal excludes WBD's pay-TV channels like CNN, TNT, and Discovery. Should the Netflix deal proceed, Warner Bros. Discovery would be required to divest these television networks into a separate entity prior to the acquisition's completion.

The initial Netflix proposal was valued at an equity value of $72 billion ($27.75 per WBD share) and an enterprise value of $82.7 billion, encompassing WBD's debt. The offer, initially structured with a combination of cash and Netflix common stock, was later revised to an all-cash agreement. Netflix's bid is supported by $59 billion in debt financing from Wells Fargo, BNP, and HSBC.

Netflix co-chief executive Ted Sarandos has characterized their merger agreement as "superior" and "in the best interest of stockholders," emphasizing its clearer funding structure and reduced regulatory risks. Netflix has also indicated intentions to maintain Warner Bros.' current operations, including theatrical releases for films.

Details of Paramount Skydance's Proposal

Paramount Skydance submitted an offer to acquire Warner Bros. Discovery in its entirety, valuing the company at approximately $108.4 billion (£80.75 billion) or $30 per share directly to shareholders. This proposal would involve Paramount obtaining ownership of WBD's networks, which include channels that compete with Paramount's existing portfolio (e.g., CBS, MTV, Showtime).

Paramount's offer is supported by the Ellison family (with Oracle co-founder Larry Ellison personally guaranteeing a portion), RedBird Capital Partners, and sovereign wealth funds from Saudi Arabia, Qatar, and Abu Dhabi, as well as a fund established by Jared Kushner. Paramount has characterized its proposal as a "superior alternative" to Netflix's, citing the provision of more upfront cash to shareholders and a perceived higher probability of regulatory approval.

Paramount Skydance's Actions Following Rejection

Following the WBD board's recommendation against its offer, Paramount Skydance extended its deadline for WBD shareholders to support its bid to February 20. Paramount has also filed a lawsuit against WBD in Delaware Chancery Court, seeking to compel the disclosure of financial details related to the Netflix deal and WBD's valuation of the proposed Discovery Global cable TV networks spin-off. Additionally, Paramount announced its intention to launch a proxy fight, planning to nominate board candidates for election at WBD's annual shareholder meeting who would support the Paramount bid.

Regulatory and Industry Scrutiny

Both acquisition proposals are anticipated to undergo review by competition regulators in the United States and Europe. Financial analysts have indicated that any successful acquisition could result in substantial consolidation within the global entertainment broadcast sector.

  • Netflix's proposal could raise concerns regarding dominance in streaming services.
  • Paramount's proposal could prompt a review concerning further consolidation within the entertainment industry and its potential impact on consumer choice, advertisers, and local television distributors, given the combined entity's potential market influence in sports and children's programming. Former President Donald Trump has publicly voiced concerns about competition issues related to Netflix's proposed acquisition and the sale of CNN.

Paramount's Stated Commitments for WBD Acquisition

David Ellison, Chairman and CEO of Paramount, has outlined several commitments as part of Paramount's proposed WBD acquisition, aiming to strengthen competition:

  • Increased Creative Output: Paramount Studios and Warner Bros. Studios would each produce a minimum of 15 feature films annually, totaling at least 30 films per year across the combined group.
  • Third-Party Content and Licensing: Both studios would maintain support for the third-party ecosystem by licensing content across their own and external platforms, and by continuing to acquire content from independent producers.
  • Preserving HBO: HBO would operate independently under Paramount's ownership.
  • Theatrical Commitment: Every film would receive a full theatrical release, with a minimum 45-day window globally before becoming available on paid video-on-demand (VOD). The intention is for 60-90 days or more for successful releases.
  • Home Video Window: Following theatrical runs, films would transition to the industry-standard home video window, preceding availability on subscription streaming services.

Financial Context and Investor Response

Since the initial Netflix deal was announced on December 5, Netflix's shares have decreased by approximately 30%. This decline has raised concerns among some investors regarding the sustainability of Netflix's growth and the potential impact of the acquisition. Analysts project a slowdown in Netflix's revenue growth over the next three quarters before a projected increase in 2027. Paramount's analysis, dated January 8, suggested that the total value of the Netflix transaction to WBD shareholders, considering the decline in Netflix's share price, was $27.42 per share.

Warner Bros. Discovery reported losses exceeding $11 billion in the past year, with its stock declining by nearly 7%. During the same period, CEO David Zaslav's compensation totaled $51.9 million. Robert Gibbs, Warner Bros.' head of communications, stated that under Mr. Zaslav's leadership, the studio has regained its leadership position with original content, relaunched the DC Universe under a unified ten-year plan, and achieved global profitability for its streaming service for the first time.

Broader Industry Landscape

The acquisition discussions are taking place amidst significant changes in the entertainment industry, including:

  • Industry Consolidation: A trend toward mergers and acquisitions has been observed, exemplified by Skydance Media's acquisition of Paramount earlier in the summer, which involved job reductions.
  • Production Fluctuations: Following a surge in production activity in 2022, the industry experienced a slowdown in 2023 due to concurrent actor and writer strikes.
  • Technological Integration: Industry professionals are adapting to the increasing integration of artificial intelligence in entertainment production.

The acquisition process for Warner Bros. Discovery continues, with various stakeholders monitoring its implications for the entertainment sector.