Warner Bros. Discovery Rejects Paramount Bid

Warner Bros. Discovery (WBD) has formally rejected the eighth acquisition bid from Paramount Skydance, choosing to proceed with an offer from Netflix instead. The rejection, issued on Wednesday, was marked by unusually pointed language from the WBD board.

WBD characterized Paramount's proposal as the largest leveraged buyout in history by a wide margin. The company further questioned Paramount's financial stability, describing its condition as 'not strong' and noting that its credit was already rated 'junk' by S&P. Additionally, WBD accused Paramount of engaging in litigation tactics and leaking information to the media.

Despite these objections, Paramount maintains that its $40.4 billion equity bid is fully backstopped by Oracle cofounder Larry Ellison. However, industry analysts suggest that WBD's aggressive stance is designed to discourage shareholder support for the hostile bid and preempt potential legal challenges.

Warner Bros. Discovery escalated its language in rejecting Paramount's bid for the eighth time. The board, led by Chief Executive David Zaslav, utilized pointed terminology in its latest filing to justify the selection of Netflix's offer.

The company specifically targeted the structure of the proposed deal. WBD called Paramount's bid the largest leveraged buyout in history by a wide margin. The filing tied the potential failure of such a deal to previous large LBOs that failed to close on initially agreed-upon terms.

WBD also highlighted the financial risks associated with the transaction. The filing described Paramount's financial condition as not strong. WBD noted that Paramount's credit was already rated junk by S&P before the deal required an 'extraordinary amount of debt financing.' In response, Paramount has emphasized that the $40.4 billion in equity for its new bid is fully backstopped by Oracle cofounder Larry Ellison, the father of Paramount CEO David Ellison.

In addition to financial concerns, WBD ramped up accusations regarding Paramount's conduct. The filing alleged that Paramount has acted litigiously and has been leaking proprietary information to the press.

WBD cited specific reports from the New York Post indicating that Paramount was considering abandoning its offer. The reports also suggested Paramount might pursue 'DefCon 1' litigation against the WBD board. WBD stated that Paramount did not deny these reports, suggesting the company was responsible for the leaks. This builds on previous WBD complaints regarding 'extensive media leaks and rumors' about Paramount's proposals.

M&A experts believe this aggressive language was drafted in anticipation of a lawsuit against WBD. Now that Paramount has lost the bid to Netflix, experts suggest it is likely to attempt legal remedies, such as a shareholder derivative suit or a direct lawsuit.

Experts analyzing the situation suggest WBD's tough talk serves multiple strategic purposes. The language appears designed to move the process forward while deterring WBD shareholders from backing Paramount's hostile bid.

According to Wharton M&A professor Paul Nary, the strong language suggests the WBD board and leadership 'just want to move on.' Nary noted that the 'largest LBO' angle is a 'new and compelling' argument for the rejection.

Legal experts also view the filing as a pre-litigation tactic. Corey Martin, managing partner of Granderson Des Rochers, noted that the filing felt calibrated to deter shareholder lawsuits. 'The audience is really the shareholders, because there's always the risk of shareholder lawsuits,' Martin said. 'It is colorful stuff, but Paramount's is a hostile bid.'

Regarding the future, analyst Rich Greenfield of LightShed Partners noted that Paramount could still outbid Netflix. However, this would 'require an overhaul of their current bid, and a dramatic increase in the cash invested from the Ellison family and/or their friends and financing partners.'