BREAKINGVIEWS-Paramount is wearing down Warner Bros resistance

By Jonathan Guilford

NEW YORK, Feb 20 (Reuters Breakingviews) - Paramount Skydance PSKY.O boss David Ellison has an M&A mountain to climb. He ascended a step higher on Friday. The ‘Mission: Impossible’ studio’s $108 billion hostile offer for Warner Bros Discovery WBD.O cleared a U.S. regulatory waiting period without challenge on Friday. In simple terms, a legal impediment to completing the deal has fallen away. Big questions about the bid's value and financial sustainability still loom. But the simplicity of its all-cash proposal is becoming more attractive when compared with rival Netflix's agreed deal.

Under U.S. law, bidders must wait for a certain amount of time as trustbusters scrutinize their transactions prior to consummation. For Paramount, the waiting is now over. This comes at a crucial moment in the WBD saga. Netflix NFLX.O, which agreed to acquire the HBO owner for $83 billion in December, allowed its quarry until Monday to negotiate with Ellison.

To be clear, as Paramount’s chief legal officer and former Department of Justice antitrust head Makan Delrahim himself once said, the government can sue to stop a deal at any time. European trustbusters must also vet the transaction. Yet Ellison's team has pushed the simplicity of the Paramount offer over Netflix’s bid, which involves spinning off WBD’s fading cable networks to its shareholders. The latest development strengthens that case.

When warily entering negotiations with Paramount, WBD warned that it wanted tighter safeguards. Paramount is proposing paying for the takeover with $45 billion of equity and $54 billion of debt. David Ellison’s father, billionaire Oracle founder Larry Ellison, has guaranteed the equity. WBD wants protections for the entire sum.

Paramount's offer is a financial stretch. Assume an 8% rate on its loans, and the annual interest bill of more than $4 billion would chew through much of the $6 billion cost savings envisaged from the combination. A sudden lurch in financing markets or the media industry’s performance could prompt the buyer – or its financial supporters – to reconsider.

Courts have largely reinforced merger contracts, and Paramount can offer other assurances, like nixing covenants that wrong-footed sellers during the pandemic. Even then, WBD can still make the case that financial doubts afflict Paramount's entire offer, while concerns over the spinoff contemplated by Netflix involve only part of that transaction’s consideration.

However, Netflix must still persuade trustbusters that it should be allowed to buy WBD. Ellison now has an advantage on that front. If he sweetens Paramount's bid, his case will become even stronger.

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CONTEXT NEWS

Paramount Skydance disclosed on February 20 that the waiting period under the Hart-Scott-Rodino Act for its $108 billion hostile tender offer for Warner Bros Discovery has expired. There is now "no statutory impediment in the U.S. to closing Paramount's proposed acquisition," according to a regulatory filing.