Warner Bros Discovery seems to be set to rebuff the revised hostile takeover offer by Paramount Skydance, despite the offer being enhanced by a personal financial commitment by Larry Ellison, a billionaire. Those who are close to internal deliberation claim that the board has not yet made an official decision, however the movement of thought indicates that the recent move made by Paramount has not alleviated the deeper issues of certainty, execution and long-term strategic fit.
The supposed merger will worth around 108.4 billion to Warner Bros Discovery and will be the second time that Paramount tries to buy the Hollywood studio. The proposal sounds ambitious or even bold on paper, in a business that has been dealing with declining cable incomes, high streaming expenses, and stiff rivalry to global customers over the past several years. However, behind the headline figure is a more complex image, one that seems not to be accepted by the board at Warner Bros Discovery.
The most important component of the new restructuring proposal by Paramount is an offer price of 30 per share in cash, the same price as it was in its previous proposal. In a bid to overcome investor skepticism that had characterized the first bid, Larry Ellison himself promised the equity of the deal. The relocation was largely perceived as an attempt to convey a feeling of confidence and assure shareholders that they would not seek to undermine financing when it is needed. The appearance of Ellison is not symbolic as well as he has a long-standing reputation of supporting ambitious deals as well as his family ties with Paramount with his son David Ellison being the chairman and chief executive.
Regardless of these changes, insiders indicate that Warner Bros Discovery is yet to be convinced. The board will hold the next meeting in a week to deliberate on the proposal although the preliminary feeling is that the amendments proposed by Paramount might not be adequate to reduce the risks that have already been established. The two companies have not spoken out publicly and remain silent amidst the speculation in the media and the investment circles.
Timing is one of the reasons why the revised bid is still not welcomed. Warner Bros Discovery is already proceeding with a competing cash-and-stock deal with Netflix which analysts have outlined as being simpler in structure and implementation. Although the Netflix offer is priced at a lower headline price of $82.7 billion, it offers a more practical financing transparency and a reduced number of regulatory and operational risks. That transparency is important in the current apprehensive marketplace.
Leaving the Netflix deal would not be easy. Warner Bros Discovery would have to pay a breakup fee of 2.8 billion, which would not be entirely compensated by the present offer of Paramount. This brings about an immediate financial hurdle on a fiduciary basis, which should be taken into serious consideration by the board. A decision to accept the offer of Paramount would result in not only adopting a more convoluted deal but also in taking up a huge penalty in the course of the same.
Investor mood has also made the way of Paramount more difficult. Harris Oakmark, the fifth-largest shareholder of Warner Bros Discovery with about 96 million shares, has publicly said he was not happy with the revised proposal. The investor labeled the bid as not being sufficient to the fact that the bid does not effectively compensate the breakup fee of the Netflix deal. These utterances are very powerful especially when they are made by big, long term shareholders whose words may have a wider market opinion.
Paramount, in its turn, has said that the combination would encounter fewer regulatory challenges than a Netflix combination. The result of a merger of Paramount-Warner Bros Discovery would be a more powerful media giant than Disney, one that combines two large TV networks and a massive film and content library in a single roof. The top managers think that such magnitude would enhance bargaining power with the distributors, advertisers, and the partners worldwide, and develop efficiencies in production and distribution.
Nevertheless, size does not necessarily be successful. The regulatory oversight is never guaranteed, especially when mergers are threatening to redefine whole areas of the entertainment sector. Whereas Paramount is insistent that its structure would have been more likely to pass, the board of Warner Bros Discovery seems to be cautious about not overestimating challenges that the company may face. Media mergers have been the order of the day in recent history and they appeared to be a good idea on paper but failed in the regulatory environment and changing market forces.
The question of strategic alignment is also present. Warner Bros Discovery has years of consolidation on its own merger, and it has gone through layoffs, corporate restructuring, and content rebalancing. A further massive merger would further destabilize the company internally at the time when it was attempting to stabilize its operations and narrow its competitive edge in streaming. The Netflix acquisition, in its turn, is perceived as providing a more acceptable way forward, although it also implies certain trade-offs.
On several occasions, the Warner Bros Discovery had advised its shareholders to dismiss the initial offer made to them by Paramount out of concern over the certainty of financing and the lack of a full guarantee by the Ellison family. Although the revised offer tries to solve those problems, it has not removed the concerns that Paramount is capable of fulfilling its promises without adding new risks. Incremental improvements might not be more important than underlying reservations to the board members of a company charged with the role of safeguarding the shareholder value.
