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- [00:04]
A
Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal worlds intersect and collide in mostly real life. We're back. Ann Lipton is a law professor at the University of Colorado, and she teaches and researches securities and business law. She holds up the legal end of this podcast.
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B
And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of the podcast.
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A
Yes, I try. So, Ann, how you been? You staying warm there? Much snow in Colorado?
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B
No, no, it's like the warmest winter on record. I bought all this gear and it's like I've got the car and the snow tires and the, in the snow shovel, and I could barely use it.
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A
We'll share some of ours. It was, it didn't, it didn't get above zero in Chicago last weekend, so. So you, you could have that if you want. Anyway.
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B
Just once.
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A
Yeah, right. Just once. That'd be nice. So let's, let's talk about something today. Let's talk about Warner Brothers Discovery, which is a interesting, complicated pending, so we don't have anything final on a deal. It's gotten its share of, you know, news in the whole, you know, business news environment for some of the players and so forth, which we'll talk about a little bit. But there's also some really interesting economics and financial issues going on because there's a bidding war of sorts between Netflix, nflx and Paramount Skydance. Peace guy. So we call Warner Brothers Discovery wbd, too, if you're looking at Symbols. Anyway, so we thought we would look for a little while at some of the legal and financial kind of aspects, but also some of the controversies. There's some really interesting stuff going on, both financially and legally about this kind of deal that we could probably start to take apart. So let's do that today, shall we? Cool.
- [02:12]
B
Absolutely. And I'll just drop the necessary reminder that we have an email address if you want to get in touch with us. We're at shareholderPrimeCrimeReefloat LLC, but swinging into this. So one thing I just have to say at the outset is that what makes this fight hilarious for corporate lawyers is it's a replay of something that happened in 1989. So in 1989, Time signed a merger agreement to acquire Warner, and Paramount swooped in after that merger agreement was signed because they wanted to break up the deal. Though in that case, it wanted to bid for Time, not Warner. And there was a big litigation in Delaware over it. And Paramount lost in a famous case that every business law student reads. And Time and Warner merged and of course that company, Time Warner combined and
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A
recombined and, oh, it's been all over the place, man.
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B
And now it's Warner again. Warner signed a merger agreement with Netflix and what ho.
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A
Once again, Paramount's trying to swooping in
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B
to break it up.
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A
Trying to poop in the punch bowl there.
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B
So, Mike, what's going on here?
- [03:19]
A
Well, okay, so let's kind of tell a little bit of the story about the deal without touching on any of the real legal stuff. And then we'll talk about some of the activism somewhat later because there's some activists. You know, Peace Guy is a little bit of an activist here, I suppose, but we can look at it through the activist lens somewhat after we've covered some of the financial and legal issues. So let's cover that. Warner Brothers, of course, kind of needed to sell itself. Warner Brothers Discovery is, you know, this famous, largely profitable movie studio. Famous Warner, it's like iconic. And there's a famous DC Comics. Right, dc, right. But they, I mean, they got franchises to all sorts of stuff, man. It's. It's got one of the best libraries around and a famous but somewhat less profitable collection of cable TV channels. The old Discovery, cnn. Right, the CNN and so forth. The main. One of those is hbo, you know, very prestigious sort of cable channel. And that's as we'll talk about a little bit. That's kind of go in with Warner Studio, not with the cable properties. But we'll discuss that in a minute. Originally, Warner Brothers Discovery plan to just spin off the cable properties. The cable properties are not growing. They don't make a whole lot of money. It's really hard for them to compete with like YouTube. Comcast just did that with its cable. Everyone no one wants cable cable TV. I mean, 30 years ago, cable TV was where it was at. That's in part what the whole Time Warner deal was about, but no longer. So originally they were just going to kind of spin off these cable properties.
- [05:05]
B
And that would mean, just to be clear, shareholders would get. Would then at the end of that, spin off. It would mean that if you're a shareholder of Warner, you would be holding shares of the old Warner, right? The studio with the studio, streaming and studios. And then you would also be holding shares of this new company that had the cable stuff. And then you could do what you like with.
- [05:23]
A
Right, exactly. And the expectation would have been that the cable studios would have, you know, potentially attracted a buyer at some point. So you wouldn't necessarily be stuck with this independent cable studio. Cable company, but who knew? Anyway, so. And then a while before this all became kind of extremely public, Paramount started looking to, to buy the whole thing. And Paramount. Paramount is Paramount. Skydance. So shortly after Viacom National Amusements kind of sold that media property to Larry Ellison's son and whose vehicle is called Skydance. So they started making bids for it and Warner Brothers Discovery said we probably need to do a formal process. And so they hired bankers and lawyers and so forth and started saying, okay, who's interested in our company, in what form? And so they went through the usual process. I've done it. I've been on boards that have had a supervise this kind of thing. You solicit bids from all these major players. They ended up with a few serious ones. The main bidders toward the end were Peace Guy, Paramount, Skydance, Netflix and also Comcast was conceivably going to acquire. It wasn't clear what their bid was like. It was, you know, they were most interested in Warner's. They can combine it with Universal just like Paramount wants to combine the Paramount studio with Warner. And anyway, so Comcast, it wasn't clear what Comcast would have done with the cable properties because they were spinning out their cable properties. But anyway, Comcast no longer there. The Warner Brothers board looked at the last bids from Peace Guy and Netflix and picked Netflix. They said, okay, we like Netflix's bid. That's the one we're going to endorse. That's the one that we're going to take a vote on, blah, blah, blah. All right, let's talk about the two bids. Netflix proposed a deal that combined a ton of cash. So they were going to have to go borrow a bunch of money. They were going to go issue a whole bunch of debt, but it was going to be cash. And also some bit of Netflix stock that amounted to 20 originally amounted and still today amounts to $27.75 per Warner Brothers share. So the valuation was somewhere in the, I can't remember the number in the 70 billion range for the enterprise value. And you know, if you look at what Warner Brothers Discovery shares were doing, they were in the 20 to kind of 25 range for the month or two before that. So that was a decent, though not, you know, healthy premium over what it was trading at. So Warner Brothers Discovery, Sheryl's would have, would have done just fine. But, but, but that deal didn't, was only for Warner Brothers studio and hbo. So right so, so the Warner Brothers Discovery shareholders, which kind of keep the cable properties as that little side company we were talking about a minute ago.
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B
So this plan keeps intact the plan of spinning off the cable companies.
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A
Yes.
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B
And then Netflix just buys streaming and studios.
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A
Right. And then, and you know, there were a couple of interesting parts. This because there were Netflix shares involved. They, you know, those can vary in price and they've gone down. Some Netflix shareholders were a little skeptical of this or you know, just the ability for this kind of newfangled, relatively speaking in Hollywood streaming, studio, whatever. We all know Netflix to kind of acquire and deal with and kind of make money off of Warner Brothers and hbo. So the share price has kind of drifted and there was a collar in the deal so that if Netflix shares decline too much. Yeah, right.
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B
It was fun for law professors because we were going to use that. But then, but then.
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A
Okay. Anyway, so, so, so Netflix announced, okay, we like Warner for reasons we're about, I think we're about to discuss. The board said fine and can. And in the middle of all that, as I said, Paramount kind of came in and pooped in the punch bowl and said, okay, we're going to come in with a different offer. We're going to go with a higher offer. So instead of 27 or basically 28 a share rounding up, they were offering $30 a share, a little more money and they were offering all cash. Now where Paramount was going to get the $90 billion. Paramount Skydance is not big, right?
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B
I mean like, so this is a tender offer. Well, I call it a fake tender offer, but we'll talk about why it's a fake tender offer. So they come out with this fake Tender offer for $30 per share, but it includes the cable. So you've got Netflix 27, 75 per share.
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A
Right.
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B
Plus the cable assets for Warner shareholders. Or you a Paramount of $30 per share for the whole.
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A
But that includes the cable properties. Exactly. So the only change since then was Netflix changed its offer, took the Netflix shares out of it. And now Netflix is just going to borrow another 10 or 15 billion more than it planned on borrowing and is going to pay all cash. Now remember, Netflix is in very round numbers a half a trillion dollar market cap company. Okay. Paramount Skydance is a, I think 20 billion. It's, it's, it's, it's magnitude smaller. So for them to, you know, kind of come up with the cash and so forth, that Paramount is, is a lot different than Netflix coming up with cash. So that's kind of where the deal stand. Netflix has an all cash offer, but the price hasn't changed. It's still 2775, just all cash. And Paramount Skydance is offering 30. And you know, 30 is greater than 28. So you'd kind of think oh, why, why did they do that? Why, why don't they take the 30, you know, and, and, and so that's for you to tell me what's going on.
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B
There are a couple different aspects to this. So one of the things is that, and this was just came out, Netflix offer is 27.75 for the streaming and studios and then shareholders get to keep the cable versus Paramount 30 for the whole thing. So you'd think that the issue here is what are the cable worth. If you think the cable are worth more with the combined 2775 you and
- [12:06]
A
then two bucks a share. Right?
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B
Yeah, right, right, exactly. And this is where it gets interesting because first of all, what Warner just disclosed, just disclosed, like they just put out this proxy was they have a lot of debt. And so a big question was where the debt goes. Does Netflix buy the debt or does the debt go on the stub shares of the cable assets? Well, it turns out now they're planning on saying around 17 billion of the debt goes on the cable assets. Oh, but, but if after shareholders vote after this deal is like basically going to get done when they're actually doing the spinoff, Warner's board has discretion to decide that for whatever reason, something, something that actually more debt should be allocated to the cable assets. And if they decide to pull the debt off the. Sorry, less debt should. I lied. Less debt should be allocated to the cable assets. So if Warner decides instead of 17 billion on the cable assets, it's going to put 15 billion on the cable assets, then that extra 2 billion or so goes to what Netflix is buying. And if they do that, Netflix reduces the price. Which means that if you're a shareholder voting on this Netflix deal, you don't actually know what you're getting. You may get 2775 plus the cable assets with $17 billion debt, but you may get 2675 with the cable assets having less debt. Warner's view is 6 of 1/2 dozen of the other that like if you're a shareholder you get less cash, but also you get shares of cable company that has let debt on it. So that you shouldn't care. That's basically Warner's position. I'm not sure that math is.
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A
That's right. Yeah, I would care. I would care because the idea is, is that Netflix eventually is going to spin off this cable unit. They're not going to want to keep it.
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B
No, the Netflix doesn't get the cable.
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A
I mean. Right, but eventually it's going to. Its shareholders are not going to. Something's going to happen to it.
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B
Right. Well, the Warner thinks it'll be acquired.
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A
Right.
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B
But, but, but I think, you know, depending on how you view the cable assets, the value of the cable assets, I mean, I'm not sure that, like, for you, like, I mean, I assume for you, it actually does make a difference whether it's cable assets with $17 billion debt plus 2775 in cash versus cable assets with, I'm making up a number, $15 billion in debt plus less money from Netflix.
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A
Right? It does. It matters. Yes, absolutely. The debt is, you know, you know, the debt influences the valuation of those cable assets.
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B
Right. So anyway, but, but, but, but Warner, but that's basically the situation now. So, but all of it comes down to do you think that the cable assets are worth more than the total value that Paramount's offering? And so Paramount, of course, put out this headline.
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A
They've been all over the place saying, yeah, this is. They're worth whatever they are, but they're worthless.
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B
That they are literally worthless. I mean, then they sort of allow for the possibility of up to $0.50 per share, but they basically say that the cable assets are worthless. And Warner, it says that the cable assets are actually worth anything from $1.33 to 6.86. That is a very big range.
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A
That's a very wide range. Yeah. Right.
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B
So, but, but my thing is that if Paramount, Paramount's fake tender offer is conditioned on Warner not spinning off the cable assets, they don't want the company. And if Warner is going to spin off the cable assets first.
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A
Right.
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B
To which my response is, well, if they're really worth nothing, why is it that you are insisting that Warner keep them so that you can acquire them? They have to be worth something.
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A
Right? There's gotta be.
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B
This is worth. This is the easiest thing in the world to solve. If Paramount really thinks the cable assets are worth nothing, let Warner spin them off just like Netflix is. Paramount offer is for $30 for the rest. Netflix offer is 2775 for the rest. It's very clear how you compare these offers. But Paramount, of course, is saying, no, they're worthless. But also, we really want them by the company unless you keep them.
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A
And that's fairly. That happens a lot. We're saying, oh, that's worth nothing, but give it to us anyway.
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B
Exactly.
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A
So. All right, there's two questions here. First is. And there's reasons why the board picked one over the other that have that explain. And I'll get to that in a second. But let me ask you something that you said a moment ago about this tender offer being kind of fake.
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B
Yeah.
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A
So what is. What do you mean by that?
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B
It's because they aren't actually asking shareholders to tender into anything. It's conditioned on regulatory approval. And we really need to talk about the regulatory approval piece. It's conditioned on Paramount getting regulatory approval and it's conditioned on reaching a friendly merger agreement with Warner. As in, they will not accept the shares unless Warner jilts Netflix and signs a deal with Paramount.
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A
And there's breakup. Their breakup fee there is enormous.
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B
The breakup fee is enormous. There's a whole bit about that as well. So. But. So this tender offer isn't actually an invitation for shareholders to tender their shares to. It's an invitation for Warner's board to agree to Paramount's offer, which is standard these days. No one actually does true hostile takeovers anymore. They don't actually make tender offers where they'll actually accept the shares. And that's because Warner can just adopt a poison pill to block it. There's no point like, you can't complete a hostile tender offer anymore. So why do they do it? First, they demonstrate the Paramount is serious. This is their way of talking to shareholders and saying, we are serious about this. And so, shareholders, you should go lobby Warner.
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A
Right. And there's a. And there's a. There's a live tender going and they've something like 7 or 8% of the shares have already tendered into it.
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B
A few have tendered into it, but there's no reason to tender into it because they can't accept it. And. Well, anyway. But. But also the reason you do this, even though it's not real, is Warner is then legally obligated to respond. And once Warner is legally obligated to respond, it has to give all of its reasons for rejecting Paramount publicly. And it has to keep those filings updated if there are any material changes in its. In its stance. So it's basically forcing Warner to act under a microscope that Paramount can watch. So that's why you do this. So the point is that every now and then there's a headline like only a few shares have tendered in. And that means shareholders prefer Warner's offer or Paramount extended the deadline. And that's silly. It's not a real offer. No one's going to tender into it. And part of the, I mean, a few have to show their support, but it's not real. And the other reason they won't is because Paramount's openly said if Warner negotiates with us, we'll pay more. Like, why would you.
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A
We're willing that. We're willing to increase our bid. And so is Netflix, by the way.
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B
But yeah, so, so I mean, the thing is that the legal standards here we'll get to. But there's nothing that can force Warner to accept Paramount's offer. Warner board has a lot of discretion to say we are going to turn Paramount down. But if the shareholders. But, but, but what will really, if nothing else, the thing that will really force Warner to the table with Paramount is if it becomes clear that shareholders are going to vote down the Netflix offer or if they actually vote down the net.
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A
That's not looking. It's not looking good, but who knows?
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B
Well, Warner's filed its preliminary proxy and we'll see. And Paramount is all soliciting shares. Soliciting votes against.
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A
Well, yeah, well, I want to talk about that in a little while. So.
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B
Yeah, so, but, so we'll see. But and also if it becomes obvious that shareholders are going to reject the Netflix deal, then Warner is just presumably will voluntarily break it off with Netflix. So this happened with Spirit. You remember Spirit had a deal with Frontier. JetBlue made a topping offer. Spirit preferred the Frontier deal, but it became very obvious that shareholders were going to vote down Frontier because they preferred JetBlue. And so Spirit voluntarily broke it up with frontier, signed with JetBlue. That never went through because of antitrust clearance, which we have talked about for this.
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A
That's what our next question is. Yes, go ahead.
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B
And then Spirit went bankrupt, so that didn't work out well.
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A
Okay, so let's get to the main reason or the big. The regulatory stuff.
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B
Main reason.
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A
It's the regulatory stuff.
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B
Okay, so it is an issue. So one of the big issues for both offers is regulatory risk. And the big regulatory risk here is antitrust. Both deals can't go through unless they're approved by antitrust regulators in the United States and in Europe. And both of them have antitrust concerns, like their antitrust concern for both deals. But, and this is where I'm not an antitrust expert, so I really cannot get into the details because it's just on my field. But from what I've seen, the antitrust concerns are bigger for Netflix and for Paramount. They both have concerns But Netflix is really, it's a bigger deal. So both Netflix and Paramount have agreed that if regulators don't approve their offers, they will pay a reverse termination fee of $5.8 billion to Warner. So if whichever one's designed with, if it's blocked by antitrust regulators, the acquirer has to pay 5.8 billion to Warner.
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A
Right.
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B
But, and this is interesting, they also both have to make promises, and this is right there in the merger agreement, about how hard they'll try to get regulatory approval before they give up. And that's a standard feature in merger agreements. Like, okay, you have to get regulatory approval. How much are you going to try to get it?
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A
Like what best efforts or whatever?
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B
Well, what kind of concessions will you make? Paramount says it will do whatever is necessary. I mean, both of them agree to litigate, but Paramount says it will ultimately, if necessary to get the deal done, it will agree to anything regulators demand, like spinning off assets, break, you know, limiting contracts. Whatever it is, Paramount will do anything up until the point where there's going to be a material adverse effect on the combined companies. And that, as we know from other litigants, Material adverse effect, that's a very high standard. Material adverse effect. You have to get really damaging before it counts as a material adverse effect. So it's a practical matter, Paramount is saying we'll do a lot. That's not what Netflix is saying. Netflix is saying that it will do whatever is necessary to get this deal through the regulatory regulators up until the point where it has a material adverse effect on Warner. But it is not agreeing to make any concessions to its own business for regulation steel run. So not only is Netflix have greater sort of antitrust risk just at the outset, but it's also limited how many concessions it's promised to make to get this through the antitrust regulators, which is one of the things that Paramount is pointing out. That said, there's this huge elephant in the room which is nothing happens without regulatory approval. And I don't know the situation in Europe, but it's very obvious that there's a political aspect to this. The Trump administration wants Paramount to buy Warner and the reason it wants that is because that puts the Ellisons, who are Trump allies, in charge of CNN and they're hoping that they'll like fire all the anti Trump commentators on cnn. Whereas, okay, so the regulators have made a lot of noises about not liking the Netflix bid, but I don't think a lot of that's coming from a place of actually being concerned about antitrust The Netflix bid means CNN gets to live.
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A
Right. Or live in its current form, in
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B
life, in its current form. The Paramount doesn't. And that shouldn't be a consideration. That should not be part of what's going on here. But it, but it is. It's a real backdrop. And when you are a shareholder trying to decide between which offer is likely to get make it through regulatory clearance, well, it looks like Paramount to me for the politics. That's a bad reason, but it's real.
- [23:30]
A
Right. And that's very interesting. I'd only heard a little bit about. I mean, I could guess because of who Paramount Skydance is, but. But yeah, that's. And that's increasingly a fact of life with deal making in this time, in this day and age.
- [23:45]
B
I mean, we know this, that like when signing deals, they're getting the lobbyists involved right away.
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A
Right.
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B
Because they know that, you know, to pitch the deal. Yeah. To see how the Trump administration is going to react on a very personalist level.
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A
All right, is there anything else to say before we take a quick break about what Warner Brothers is kind of dealing with here, kind of legally?
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B
Yeah. So, I mean, the thing is that Warner is selling itself. It has to pick the highest, like get the best attainable price for the company. And it's chosen Netflix in part because of how it values the cable assets. What it can't do is lock Paramount out of the bidding. If the Netflix deal is inferior to Paramount's, as long as it's choosing between those two deals, it has to pick the highest one and it has to let Paramount, you know, make its case. But if shareholders vote Netflix out down, let's say shareholders vote Netflix down. Warner technically doesn't have to accept Paramount. It could still just say, nope, we don't want to sell, then it is.
- [24:45]
A
Or it could reopen the bidding. It is, it is all sorts of things it could do.
- [24:48]
B
Yeah. But what it probably can't. So, so this is why the only thing to do, and we'll talk about this, because this is like your thing is if. Is if, even if shareholders reject Netflix, the only thing that Paramount can actually do to force this, actually force Warner to accept the Paramount bid is a proxy contest. And which. That's one of the things that it's threatening.
- [25:09]
A
It's talked about that a little bit, but we'll, we'll, we'll return to that in a little while. So. All right, so Warner Brother has. Warner. Warner has. I mean, they've got an interesting situation. They got an asset they can make some money off of. But they're really getting kind of stuck between the. It's clear that they want Netflix. I mean, it's not. I mean, for various reasons.
- [25:29]
B
We'll talk other reasons in their proxy that are just very. Well, they're strange.
- [25:33]
A
Right. But, and so they're, but, you know, they're running up against, you know, some civic affairs and some legal requirements and so forth. So. Wow. All right, let's. Let's return to this. Cause we'll talk more about some of the activists and some of the litigation aspects of this after a quick break here at Shareholder Primacy.
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C
Shareholder Primacy is brought to you by free flow analytics.com the only free database of corporate directors, their influence and their performance. If you own a stock or retirement plan, go to freeflowanalytics.com and look up which of your elected directors are performing well and which aren't. Use your vote in the alternative democracy and get your data @free flow analytics.com now back to the show.
- [26:19]
B
Welcome back to Shareholder Primacy. I'm Ann Lipton here with Mike Levin. We're talking more about Warner, Netflix and Paramount.
- [26:26]
A
Yes, we are. So we kind of set the scene with the deal and the economics of it and some of the deal legalities. But some other stuff has happened that we want to talk about. There's some litigation that's kind of unfolded and then there's some more pure activist aspects to this, which is a little unexpected, but not, not completely. So let's talk a little bit about who's suing whom here.
- [26:53]
B
The first. So Paramount a little while ago filed a lawsuit in Delaware. I actually think that particular lawsuit is mooted, but some of it's interesting. So when Warner first rejected Paramount's offer, it didn't include all the financial details of the Netflix deal. In particular, they didn't tell you what was going to happen to the debt. Now we know. And it didn't explain how Warner was valuing the cable assets. So Paramount filed this lawsuit to force Warner to disclose this information. And Paramount's argument was Warner was asking shareholders to take action, reject its own tender offer, but wasn't giving shareholders enough information to make the decision. And Warner's argument was there was no action for shareholders to take because Paramount's tender offer is fake.
- [27:36]
A
Oh, okay.
- [27:39]
B
And that's. And what actually what Vice Chancellor Zern held. And the thing about bench rulings in these kinds of rush situations is sometimes they're not like, you know, fully fleshed out in reason. But what she held was a Little weird. What she held was there was actually a motion for Paramount to expedite all of this to make it really quick because they were in a big rush. And what. Vice Chancellor Zern denied the request to expedite on a sort of weird reason. She said that Paramount, as the bidder had no standing to bring a lawsuit based on Warner's breach of fiduciary duties to its own shareholders. Delaware doesn't allow disappointed bidders to bring claims. And that's. Can't be right. I mean, first of all, Revlon was a disappointed bidder, like. And that's like the classic takeover battle that settled the company. And there was. That was a disappointed bidder suing. But also a lot of the other disappointed bidder cases, like Paramount's own lawsuit against time back in the late 80s, they include the disappointed bidder and often a shareholder class at the same time. But usually courts treat the shareholder class as an afterthought. They really just focus on the disappointed bidder. So it can't really be the disappointed bidders are not able to sue when they're being unreasonably blocked. But I do think if you take her ruling as narrower to mean something like Paramount as a disappointed bidder doesn't get to sue, that Warner didn't disclose enough information to its own shareholders like Paramount. If it doesn't think there's enough information, Paramount is the one who gets to talk more. But it can't really say Warner is not talking enough to its own shareholders. So I think she kind of overstated that one. But. But. So I think that if this continues to proceed, it's. I mean, you could. Let's just say I would not imagine that Paramount is boxed out from bringing a lawsuit saying that Warner is violating its fiduciary duties substantively, not just on a disclosure basis, by preferring an inferior financial offer. Which gets to the question of whether it actually is inferior.
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A
Right. And that's not clear because of the structure of the deal, because of the cable assets and because of the regulatory risk.
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B
Yeah, well, yeah, but it's just. It's particularly odd because Paramount, one of their complaints is Warner won't even talk to us and we're willing to bid more.
- [29:57]
A
Why? There's no negotiation going on. But I don't think they're. I mean, you talked about Warner's obligations a little while ago, but one of them is not. We have to continue to negotiate with a bidder we've rejected. Is it?
- [30:08]
B
No, it isn't. But it is to get the highest possible price. And so the question is why? They can't possibly know in this absolute sense that Paramount. They don't know what Paramount's actual reserve price is. Which means they can't possibly know for sure that bidding with the. Talking with them won't get a financially superior offer. So you have to ask why they aren't negotiating. Or at least they don't appear to be negotiating, at least from the outside. That seems to be Paramount's complaint. And the reasons that it's giving, I mean, I gotta say, they're getting stranger and stranger.
- [30:41]
A
Yeah.
- [30:41]
B
Yeah. Most of Warner's reasons for not negotiating boil down to if it breaks the deal with Netflix, signs with Paramount, and then the Paramount deal doesn't go through, Warner will be in a much worse position than before, worse than it even would be if the Netflix deals failed
- [31:00]
A
and never come up. Okay.
- [31:01]
B
Yeah, Right, right. And the reason for that is if regulators block the Netflix deal. Regulator. Netflix has to pay Warner 5.8 billion, and then Warner goes ahead with its original spinoff plan. But if Warner abandons Netflix first, it has to pay Netflix a $2.8 billion break fee and Paramount won't reimburse that fee. That's fine if the Paramount deal goes through. It doesn't matter if the Paramount deal goes through. But if the Paramount deal is blocked by regulators, Paramount pays the same 5.8 billion break fee that Netflix will. Only now Warner's already in the hole by 2.8 billion in its proxy file.
- [31:40]
A
So their net on the brake fees is less.
- [31:44]
B
Is less. And Warner even referenced the recent fight that we talked about between Pfizer and Novo Nordisk and Medsera. There, Novo was willing to reimburse the brake fee if Matsera abandoned Pfizer. But here, Paramount won't. And there's another issue. Paramount has these operating covenants that it wants Warner to stick to between signing and closing. And in particular, these are about debt because, I mean, we started talking about Paramount doesn't have nearly as much money as Netflix does. So it's right. This is a highly leveraged offer. It's very fueled by a lot of borrowing. And as a result, Paramount really wants Warner to minimize its debt levels once the deal closes. So if Warner signs with Paramount, it has to agree to get rid of debt and not restructure certain debt that it want, that Warner doesn't want to do. So basic. Paramount basically wants Warner to reduce its debt levels before closing, which is reasonable given Paramount's overly leveraged situation. But Warner's fear, what it Says it's fear is that if it doesn't close with Paramount, we've really screwed ourselves on our debt management.
- [32:48]
A
Right. We can't go through, we've avoided, we have, we haven't done any of this debt management we could have been doing. And then we're right and we can't
- [32:55]
B
and they can't do. And we won't be able to do the spin off. So, so basically these aren't crazy objections. But these objections are entirely predicated on the idea that we might, even if we sign with Paramount, it may not go through. That's what basically it boils down to. It means we're going to be in this. If we sign with Paramount, we will be in a terrible position if the deal doesn't go through. So that begs the question, are they right? Is it likely that if they sign
- [33:24]
A
with Paramount or how likely is it right? How likely?
- [33:27]
B
Otherwise none of these make sense. Now why do they think that the Paramount deal won't go through? Well at first, originally their objection was that the Paramount consortium funding this included foreign investors. And that would create national security like regulatory risks from like National Security Review. So Paramount got rid of the foreign investors. Now it's just the Ellison family and Redbird Capital and like American banks. And Paramount promised that it won't syndicate any of this to foreign investors if doing so would risk deal approval. And Warner openly says we think you're lying. Like they say they think we don't believe you.
- [34:04]
A
We don't believe you.
- [34:04]
B
Don't believe you. So the next objection. The deal is partly financed by the Ellison family trust. Like you know, this is the big trust that holds all the Ellison assets. And Warner said not good enough because what if Larry Ellison pulls all the money?
- [34:19]
A
We need Allison's, we need Allison's. We actually talked about this. We need Ellison's actual, actual money. We don't need his trust. Right.
- [34:26]
B
And at first the Ellisons wouldn't say that Larry Ellison was personally liable. It's a weird thing to think that might happen. That Ellison's going to pull all his money out of the trust so that the trust is like, doesn't have any assets. But now the Ellison have agreed. Ellison is guaranteeing the money. That's not an objection anymore. But there are still more objections. So both companies, Netflix and Paramount can break off the deal if Warner experiences a material adverse effect. That's pretty standard. That's, you know, it's always true. Both companies can break out the broke up the deal if Warner experiences a material adverse effect. Very high bar, but it can happen. But Netflix is only buying part of the company, the streaming and studios part. Which means Netflix will only pull out if there's a material adverse effect on, on streaming and studios. Paramount, however, will pull out if there's a material adverse effect on the whole thing and anything. Because Paramount is also buying the cable assets. So Warner is saying there is a greater risk. Paramount will pull the material adverse effect clause because it is judging material exercise that clause, Right? Yes, well, because of the, because of the cable assets are included. But I mean, sure, but one case in Delaware history has ever found a material adverse effect. I mean, how likely is that?
- [35:48]
A
Unlikely. Yes.
- [35:49]
B
Warner says it's worried because the Paramount deal is extremely highly leveraged. It includes $54 billion in debt from Citi, Citigroup and Bank of America.
- [35:59]
A
Yeah, there's a whole, There's a whole. There's a whole syndication. They did where they promised.
- [36:02]
B
Yeah, exactly. And Warner says this will make Paramount an incredibly risky company. Now the first question you would ask as a Warner shareholder is why do you care?
- [36:11]
A
Yeah, who cares? I'm going to. Because I'm going to. I'm getting cash. Right, exactly, exactly.
- [36:16]
B
So Warner has to come up with a reason for why a Warner shareholder would care. And their answer is Paramount's financial condition is so over leveraged as a result of all this that the lenders might back out. The Ellison's might.
- [36:30]
A
Oh, so, so, so between, between, between agreeing and closing, they're worried that, that the lenders will look at the debt, the debt structure and say, okay, we weren't serious. We didn't.
- [36:41]
B
Citigroup, bank of America. And also they're afraid that the Ellisons will take another look and change their minds. Do you think it is likely that Citigroup, bank of America and the Ellison are going to look at this deal?
- [36:53]
A
Not if they want to do future leverage deals with anybody.
- [36:56]
B
Exactly. And Paramount also, and Warner Brothers is also pointing out like they're really going to like finding everything they can. They're pointing out that Paramount just signed new deals with UFC and South park that will drain its cash flow. So that to try to make it sound really likely that Citigroup is going to suddenly just wait a minute, you're that leveraged? I can't.
- [37:17]
A
And we sort of knew this.
- [37:19]
B
But yeah, okay, this just seems silly. Warner actually cited Musk's attempt to back out of the Twitter deal as evidence that this is particularly likely.
- [37:27]
A
Well, and he's not part of this one.
- [37:28]
B
So all of this strikes me These do not strike me as particularly robust reasons for doubting that the Paramount deal would actually go through. What seems quite real, though, is Warner's board doesn't like the Ellisons. And I don't mean personally. I mean, they resent the tactics that Paramount has employed. And they openly say they don't trust Paramount. They think Paramount started making threats right out of the gate by publicly accusing them of violating their fiduciary duties early in the process. And they point out that Paramount's deal counsel is Quinn Emanuel. That's not a deal firm. They're a litigation firm. And they point out that Queen Emanuel is the firm that repped Musk when he tried to get out of the Twitter deal. So they say Paramount's entire aggressive approach here makes Warner doubt them. And it's the kind of thing that makes them not trust that Paramount won't suddenly pull out or try to get out of the deal or try to litigate it until the debt covenant's in spur expire. Like, that's basically what it comes down to. So they're coming up with all these reasons why they think this deal won't actually close with Paramount, but a lot of it has to do with. They think Paramount has just approached this in a way that gives them.
- [38:37]
A
No, it's just. It's sort of. Sort of, sort of. It's this broad, very broad accusation of kind of bad faith.
- [38:43]
B
Exactly.
- [38:44]
A
That they.
- [38:46]
B
So, yeah, so that's basically their reasons. And now we have Paramount threatening activism, as you say.
- [38:52]
A
Right. Well, and that. And that's. That's what we want to kind of COVID for a moment is that there was at least two different activist efforts made here. So there's actually. So. So, you know, the first thing that's going on is this tender, this fake tender. That's not really activists. They're just trying to, you know, buy the shares. But there's some really strange conditions attached to the actual closing of the acquisition of the shares. There's at least two other things. One that's been hinted at and one that's been announced. The announced one is Paramount is actively soliciting in opposition to the deal. So Warner has published, you know, preliminary proxy, because Warner shareholders have to approve this. And so Paramount is out there jumping up and down or is going to start to jump up and down in front of Paramount shareholders and start to say this is a bad deal. Paramount shareholders don't approve this. It's not. They're not saying. I mean, they may say ours is better.
- [39:57]
B
Yeah, but that's the. That's the implication.
- [39:59]
A
Right. The implications.
- [40:00]
B
But they're trying to solicit proxies.
- [40:02]
A
Right. So. So they are. They are trying to compete with Warner Brothers to collect votes from Warner Brothers shareholders. They've hired really good proxy solicitor Okapi, and it looks like they're, you know, they can afford it. They're gonna really do an effort here. So that is.
- [40:21]
B
I can't afford it. According to Warner.
- [40:22]
A
Yeah. Right. But that. So that's happening. That's happening Paramount. And this is. This hearkens back to like, you know, this is stuff that wasn't even tried in the 80s. The thing that was tried in the 80s, when this was very popular, was the thing that they hinted at but haven't done yet, which is running a competing slate of directors.
- [40:41]
B
Yeah.
- [40:41]
A
At a Warner Brothers shareholder meeting.
- [40:44]
B
Do you know when that would take place? Like, I mean.
- [40:46]
A
Well, the meeting. The meeting would be like, you know, May, June.
- [40:51]
B
Yeah. So that's the thing. The Netflix vote, I think is. Is probably going to be April.
- [40:55]
A
Oh, it's going to be. Yeah. They're going to schedule the Netflix vote for sooner and there, you know, because it's a special meeting, the Warner Brothers is in control of the agenda. And of course they're not going to put director elections on that. But if somehow that were to get knocked around or something, Warner Paramount has said, we're going to also run competing directors. Now, they have until February 2nd. That's when that's the deadline to submit a notice to Warner Brothers of its nominees. So I'm guessing that's ready to go. And they probably have a bunch of nominees already lined up. They haven't announced it yet. They kind of hinted at. In, like, in a news. I can't remember where they saw it, but they've said, we're going to also do this. Now, again, their timing could be way off because they may be working on directors after the deal gets approved.
- [41:50]
B
Well, I mean, this is. Yeah, I mean, this is what's sort of weird, like, because as I said, if the shareholder. They're soliciting votes against the Netflix deal. If the shareholders vote in favor of the Netflix deal, it's obvious that they're saying we were rejecting you. Paramount. If the shareholders vote against the Netflix deal, that is basically the shareholder saying, we want the Paramount deal. Yes, but. But as I said, Warner can't, like, Paramount can't force Warner to accept Paramount even if Netflix is voted down. They would probably accept Paramount if Netflix is voted down. But we don't know that for sure.
- [42:29]
A
Right. And given the current Warner Brothers board, they may really dig their feet in,
- [42:35]
B
especially because they're really angry with Paramount.
- [42:40]
A
Right. And so the way for Paramount to kind of push this forward, assuming they can in this case solicit enough votes in opposition.
- [42:49]
B
Yeah.
- [42:49]
A
Because, you know, again, suspenders. Right. Well, that what they'll do is they'll then say, okay, we're, you know, we, we've got enough support from shareholders to reject the deal. That sort of means. Translates to enough support to put in a bunch more friendly directors.
- [43:06]
B
Exactly. Yeah. But I mean, it's interesting because you wouldn't think they'd have to do both. You'd think that voting down Netflix would be enough because that's a pretty strong signal to Warner. But also, running a director contest is like, you know, really.
- [43:18]
A
Oh, that's a whole, that's, that's, that's a whole different order of magnitude, which
- [43:22]
B
is water's whole point. You're too aggressive. Stop.
- [43:25]
A
Yeah, exactly. So anyway, so we'll see. So, so the, the next milestone amid all the almost daily, like, you know, news releases and social media posts and so forth will be whether Paramount announces a board slate on before February 2nd or whether Warner Brothers announces. Announces that they've, that they've nominated directors
- [43:48]
B
or if Powell just decides to leave it at Will compete over the Netflix. I mean, if the shareholders vote down Netflix, I think it's really likely Warner's going to go back to the bargaining table with power.
- [43:58]
A
Oh, probably right. And in this kind of case, it's absolutely not clear, you know, how it's going to be valued and so forth. We're talking about some fairly nuanced issues that most shareholders or at least reach. And I don't know what the retail shareholder base is. It's not big, but, but trying to, you know, appeal to, you know, all the different institutions and so forth and try to say, and our deal's better. No, the regulatory. It gets, it gets really into the weeds really quick. So it'll be interesting to sort of see how it goes. But. Okay, so February 2nd's the next date, and then hopefully we'll get a little more clarity about, you know, what, what each of the players wants to do. So. All right, cool. All right, let's put this aside. We have to revisit this at some time soon, but this is a lot. There's a lot going on. So this is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations. Ann is professor of Law and The Lawrence W. DeMuth Chair of Business Law at the University of Colorado Law School. You can find me mike@theactivistinvestor.com and annatlaw colorado.edu. our podcast is produced and distributed by Free Float Media. Thanks for listening. We will talk again soon.