Warner Bros Discovery's board spurned Paramount Skydance's $108.4bn hostile takeover bid Wednesday, calling the offer "illusory" as it accused the studio giant of misleading shareholders about its financing.
Paramount and Netflix have been in a race to win control of Warner Bros, and with it, its prized film and television studios, HBO Max streaming service and franchises like "Harry Potter." After Warner Bros accepted the streaming giant's offer, Paramount launched a hostile offer to outdo that bid.
In a letter to shareholders Wednesday, the Warner Bros board wrote that Paramount had "consistently misled" them by saying its $30-per-share cash offer was fully guaranteed, or "backstopped," by the Ellison family, led by billionaire and Oracle co-founder Larry Ellison.
"It does not, and never has," the board wrote of the guarantee of Paramount's offer, noting that the offer posed "numerous, significant risks."
The board said it found Paramount's offer "inferior" to the merger agreement with Netflix. Netflix's $27.75 per share cash-and-stock offer for Warner Bros' unit is a binding agreement that requires no equity financing and has robust debt commitments, the board wrote.
The offer could be terminated or amended at any time prior to the deal's completion, which is not the same as a binding merger agreement, the board said.
Warner Bros has not yet set a date for a shareholder vote on the deal but it is expected to happen sometime in spring or early summer, its Chairman Samuel Di Piazza said in an interview with CNBC.
The Ellisons have cited their relationship with US President Donald Trump as a reason why the deal would face an easier regulatory path.
Paramount accused Warner Bros of hiding behind a "cloud of obfuscation" and said its all-cash bid provides more certainty against the "market fluctuations" than Netflix's cash-and-stock offer, which has been reduced by a drop in its share price.
"Our proposal clearly offers WBD shareholders superior value and certainty, a clear path to close, and does not leave them with a heavily indebted sub-scale linear business," Paramount CEO David Ellison said.
Meanwhile, Netflix is in talks with the US Department of Justice and the European Commission, its other co-CEO Greg Peters told CNBC, while expressing confidence in how regulators would view the deal.
Warner Bros shares fell 1.2% to $28.5, while Netflix gained 2.5% and Paramount fell 4.8%.
A spokesperson for Affinity Partners – the investment firm run by US President Donald Trump's son-in-law Jared Kushner – confirmed it was no longer part of Paramount's bid, saying the "dynamics of the investment have changed significantly" since it joined in October.
Netflix has told Warner Bros it would keep releasing the studio's films in cinemas to ease fears that its deal would eliminate another studio and major source of theatrical films, according to people familiar with the matter.
Paramount last week took its case directly to Warner Bros shareholders, arguing it has arranged "air-tight financing" to support its bid, with $41bn in new equity assured by the Ellison family and RedBird Capital, and $54bn of debt commitments from Bank of America, Citi and Apollo.
Warner Bros board countered that Paramount's latest offer includes an equity commitment "for which there is no Ellison family commitment of any kind," but rather the backing of "an unknown and opaque" Lawrence J Ellison Revocable Trust, whose assets and liabilities are not publicly disclosed and are subject to change.
"Despite having been told repeatedly by WBD how important a full and unconditional financing commitment from the Ellison family was...the Ellison family has chosen not to backstop the PSKY offer," the Warner Bros board wrote.
"A revocable trust is no replacement for a secured commitment by a controlling shareholder."
Paramount has submitted a total of six bids to acquire the entire Warner Bros studio, including its television networks, including CNN and TNT Sports.
It has said the Ellison family trust – which Paramount says contains more than $250bn in assets including about 1.16bn shares of Oracle – is more than adequate to cover the equity commitment.
Warner Bros has raised doubts about Paramount's financial condition and creditworthiness. The offer relies on a seven-party, cross-conditional structure, with the Ellison Revocable Trust providing just 32% of the required equity commitment while capping its liability at $2.8bn, Warner Bros said. It noted that the trust's assets could be withdrawn at any time.
"The PSKY offer provides an untenable degree of risk and potential downside for WBD shareholders," the board wrote.
The Warner Bros board noted that Netflix has an investment-grade rating and a market value exceeding $400bn, while Paramount has a $15bn market capitalisation and a credit rating "a notch above 'junk.'
A combination would leave Paramount with a debt ratio of 6.8 times its operating income "with virtually no current free cash flow."
The bidder would also impose what Warner Bros said would be "onerous operating restrictions" on the company, during the potentially lengthy period between signing and closing, including limits on new content licensing deals.
Paramount's plan to achieve $9bn in "synergies" across the two studios was described as "ambitious", the Warner Bros board said, and would represent a new round of job losses that "would make Hollywood weaker, not stronger."
Warner Bros' board dismissed Paramount's charges of unfairness – set forth in a filing by Paramount last week – saying it held dozens of calls and meetings with the studio's principals and advisers, including four in-person meetings and meals with CEO David Zaslav and Paramount CEO David Ellison, or his father, Larry Ellison.
"After each bid, we informed PSKY of the material deficiencies and offered potential solutions," the Warner Bros board wrote. "Despite this feedback, PSKY has never submitted a proposal that is superior to the Netflix merger agreement."
