Paramount WBD stock tender offer: pros and cons

few hours ago warner bros discovery agreed to sell studio and streaming assets to NetflixNetflix co-CEO Ted Sarandos called WBD CEO David Zaslav to inform him that Netflix would not make any further bids.

WBD shareholders took the opportunity to criticize Sarandos’ bluff.

WBD shareholders have until January 21 to bid their shares to Paramount for $30 in cash, but that deadline may be artificial. Paramount may extend it to the WBD annual meeting, which has not yet been determined, but this year it was held on June 2nd.

Paramount’s acquisition of 51% of WBD’s outstanding shares would give it control, even though WBD’s board has already agreed to sell its studio and streaming assets to Netflix. Both Netflix and Paramount will be able to sit down with WBD shareholders over the coming days and weeks to determine whether to accept Paramount’s offer or follow the board’s recommendation to sell to Netflix.

To bid or not to bid, that is the question. There are healthy arguments on both sides. The decision also presents an element of game theory for shareholders who simply want a bidding war rather than worrying about the right buyer.

There are two main reasons why shareholders tender their shares to Paramount.

The first is if investors believe Paramount’s all-cash offer of $30 per share for all of WBD is worth more than Netflix’s $27.75 per share bid for just the Warner Bros. movie studio and HBO Max streaming business. The second is the belief that an initial public offering is the best way to force a bidding war between Netflix and Paramount.

Shareholders may decide that Paramount’s current offer is better than Netflix’s because they think Paramount has a better chance of regulatory approval, or if they think Discovery Global (a portfolio of linear cable networks that includes CNN, TNT, Discovery, HGTV, and TBS that will be spun out) has minimal value as a public company.

Paramount Skydance CEO David Ellison told CNBC earlier this month that he valued Discovery Global’s stock at $1 per share, estimating the multiple that Discovery Global would likely trade at based on current valuations for similar linear cable networks (2x earnings before interest, taxes, depreciation, and amortization). If WBD does not agree to sell the entire company to Paramount, it plans to spin off Discovery Global into its own publicly traded company in mid-2026.

Paramount’s argument is that $30 per share is already more than Netflix’s $27.75 per share plus Discovery Global’s $1 per share.

Paramount’s bid is also all cash, but Netflix’s bid includes a 16% so-called collar, meaning shareholders won’t know exactly how much Netflix stock they’ll actually receive until the deal is completed.

Regarding regulatory approval, Paramount has argued that combining its Netflix and HBO Max streaming businesses would be anticompetitive. Netflix has more than 300 million paying customers worldwide. The idea of ​​the biggest streamer buying HBO Max has already raised concerns among politicians, including President Donald Trump, who said the deal with Netflix could have “market share” issues.

Paramount plans to combine Paramount+ and HBO Max, but Paramount+ has about 80 million subscribers and poses little risk to competition.

The second, more nuanced argument for bidding is maximizing upside even if the assets ultimately go to Netflix.

Mr. Ellison has already made it clear that Paramount’s $30-per-share offer is not the best and final one. The bid could force Netflix to make a higher offer, and Paramount could also raise its bid.

“The idea of ​​Company A and Company B having a bidding war. That’s what we like as part of the free market system,” Mario Gabelli, chairman and CEO of GAMCO Investors, told CNBC earlier this month.

He added last week that he had previously been leaning toward an initial public offering for Paramount, but that “the most important thing is to continue doing that.”

In contrast, other shareholders may believe that not making a bid is the best way to stimulate a bidding war. Paramount could raise its bid to attract more shareholders if it deems it lacks shareholder support as the annual meeting approaches.

There are other reasons not to bid. Shareholders may want an equity portion of Netflix and Discovery Global’s offer.

The company said in a filing with WBD last week that a mysterious “Corporation C” has proposed to buy Discovery Global and a 20% stake in WBD’s streaming and studio businesses for $25 billion in cash. The bid was rejected by the WBD board as “unfeasible”.

Still, the mysterious bid suggests there may be a buyer interested in the entire Discovery Global company if it is spun off, which could fetch well over $1 a share, said Rich Greenfield, an analyst at Lightshed Partners. That would make Netflix’s offer far more valuable than Paramount’s bid, so that’s a good reason not to bid, he said.

Greenfield said it was also a safety net for shareholders to ensure Discovery Global’s WBD split in case regulators blocked the Paramount-WBD merger. Mr. Ellison’s bid, which includes about $24 billion from a Middle East sovereign wealth fund, could run into regulatory and political hurdles, Mr. Greenfield noted, because Paramount’s deal covers the entire WBD, including CNN.

“You want a breakup to happen,” Greenfield said in an interview. “Even if the Paramount deal doesn’t get regulatory approval, it still prevents a breakup. We’re stuck in 2027 with the cable network’s decline, but we’re not breaking it off. Does the U.S. really want a company funded by more Middle Eastern money than the money from the Ellisons, who own CNN?”

WBD’s board claimed part of its rejection of Paramount’s $30-per-share bid was due to financing concerns, noting that more money came from Middle Eastern sovereign wealth funds than the Ellison family, which has put in about $12 billion.

Paramount changed the terms of the deal on Monday to address financing concerns. Oracle founder Larry Ellison, David’s father and one of the world’s five richest people, has agreed to provide “equity financing for the proposal and an irrevocable personal guarantee of $40.4 billion in damages against Paramount” if existing financing fails, Paramount said in a statement.

Paramount also announced Monday that it would release records confirming that the Ellison Family Trust “owns approximately 1.16 billion shares of Oracle common stock and that all material liabilities of the Ellison Family Trust have been disclosed.” Paramount said a family trust backed the financing. WBD’s board previously claimed the trust was an “opaque organization” and wanted direct involvement from the Ellisons.

Notably, despite Monday’s announcement, the Ellisons have not increased their personal stock investments, which still stand at $12 billion. Internally, some WBD executives are quoting the 1970 Carl Reiner film “Where’s Poppa?” A person familiar with the matter said this when discussing the bid. WBD is asking the Ellisons to commit more personal funds to the deal.

Still, WBD shareholders may not care where the money comes from, as long as it’s there. The three SWFs involved in the transaction are Saudi Arabia’s Public Investment Fund, Abu Dhabi’s Rimad Holding, and Qatar Investment Authority. PIF and QIA, in particular, are known as institutions that have contributed billions of dollars to other U.S.-based transactions.

Correction: This article has been amended to correct that Warner Bros. Discovery shareholders have until January 21 to tender their shares to Paramount for $30 in cash. Previous versions incorrectly listed this deadline.