As Paramount moved forward with its months-long attempt to acquire Warner Bros. Discovery, the company insisted on highlighting an ace it said it had up its sleeve: Larry Ellison, the billionaire father of Paramount CEO David Ellison.
“We are providing resources guaranteed by one of the richest families in the world,” Paramount wrote in one of its six letters sent to Warner Bros. Discovery, according to documents filed Monday with regulators.
But behind the scenes, doubts about the true extent of Ellison’s financial support were one of the factors weighing on Warner Bros.’ decision. to opt for Netflix, two people familiar with the deliberations said.
Larry Ellison has an estimated net worth of approximately $273 billion, accumulated primarily through his stake in software giant Oracle, whose market value today approaches nearly $630 billion. However, the board of directors of Warner Bros. Discovery was concerned that Ellison had not provided a personal guarantee for the proposal made on his behalf and that he planned to provide capital through a fund whose assets could be changed at any time.
According to these people, Warner Bros. Discovery feared it would have little room for action if Paramount’s proposal failed.
Last week, Warner Bros. Discovery announced it would sell a large portion of its business to Netflix for $83 billion, considering that proposal superior to Paramount’s offer to acquire the entire company. In making this assessment, the board of directors of Warner Bros. Discovery concluded that the deal with Netflix provided greater shareholder value and a greater degree of security.
Paramount has a market value of about $15 billion, a fraction of the size of the company it is trying to acquire. Additionally, she carries debt roughly equivalent to her net worth and has a credit rating one notch below what is known as “junk rating.” That makes funding from Ellison and other partners critical to the proposal, which also includes $54 billion in debt.
Netflix is an industry giant, worth around $420 billion, and its credit is considered safe by the market. To finance its offer, the streaming giant plans to use more than $10 billion in cash, in addition to part of its shares and loans obtained from a group of banks.
With its proposal rejected, Paramount is now expected to begin a long battle to try to acquire Warner Bros. Discovery and convince shareholders that the board of directors made a mistake. If enough shareholders support Paramount, it would put pressure on the Warner Bros. board. Discovery to accept your offer.
The extent to which shareholders share the company’s concerns about Paramount’s financing should influence their decision to side with Netflix or Paramount.
For shareholders, the biggest concern will likely be whether selling the entire company to Paramount is more beneficial than selling only part of the business to Netflix and spinning off the cable business as an independent company.
In a letter sent to shareholders Wednesday, Paramount laid out its arguments and refuted questions about its financing.
“To suggest that we are not ‘good payers’ (or that we might commit fraud in an attempt to evade our obligations)” is “absurd,” Paramount said. “This absurdity is made even more obvious by the fact that WBD and its advisors have never called, texted or emailed to raise any questions, concerns or requests for clarification about the fund or our capital commitment documents.”
» said a spokesperson for Warner Bros. Discovery said “the board and the company have been conducting a fair and transparent process with each of the bidders for months, including numerous opportunities for due diligence and negotiation.”
While there aren’t many examples of billionaire-financed acquisitions for comparison, Elon Musk’s attempt to buy Twitter included a personal guarantee, noted Jim Woolery, a lawyer who has advised on several such disputes and founder of the consulting firm Woolery & Co.
“Shareholders will pressure Warner to talk, but they will also pressure Paramount to present more evidence of capital,” Woolery said.
How Warner Bros. Discovery has already rejected Paramount’s proposal, with legal experts saying the company is unlikely to negotiate on the same terms again. Netflix deal prevents Warner Bros. Discovery to seek other proposals without paying a high fine. However, if Paramount increases its offer, it could be a game-changer. The company has already informed Warner Bros. Discovery that his latest proposal is not the “best and final”.
Warner Bros. action Discovery is up nearly 14% since Paramount launched its hostile bid, signaling that investors are betting that Paramount has yet to increase the valuation offered.
According to the offer letters, Paramount said Lawrence J. Ellison Revocable Trust and private equity manager RedBird Capital Partners would support the $40 billion in equity required for the transaction, in addition to receiving contributions from other partners.
These additional partners were not named, but under previous proposals made public Monday, Middle Eastern sovereign wealth funds would contribute about $24 billion, alongside investment managers such as Jared Kushner’s Affinity Partners. If these other partners do not materialize, Ellison’s trust would pay the entire $40 billion.
The board was concerned that the trust is revocable (meaning whoever administers it can change it at any time) and wanted to establish a $2.8 billion limit for possible damages if Paramount failed to meet its contractual obligations, the sources said.
Ellison’s empire is also facing pressure. Oracle stock, the main source of its fortune, closed almost 11% lower on Thursday, after reporting results that raised concerns about its bets on artificial intelligence. Even so, shares are still up about 20% for the year.
Netflix, for its part, faces its own challenges as it attempts to buy Warner Bros. Discovery. The company has already agreed to take on nearly $60 billion in debt to finance the acquisition and may refuse to take on even more debt to counter any increase in Paramount’s offer. Netflix shares have fallen about 4% over the past five days, reducing the value of its cash-and-stock proposition.
“Netflix has grown a lot on its own and the price tag is huge,” said Dave Novosel, senior analyst at Gimme Credit, expressing concern about the amount of debt the company took on to complete the deal.
Novosel lowered its recommendation on Netflix debt due to market underperformance.
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