Buy or Die

0:00I feel like you've become the axe on what could be one of the biggest mergers of all time. and I know there's a lot of people at puck covering this story from different angles but like you're you're all over this thing how does it feel is it exciting well you know first of all Josh you probably remember I mean I was an M &A banker for you know 20 years and worked on uh you know the first uh you know Viacom Paramount deal when I was at Lazard so this is a little bit of history repeating itself and putting back on my M &A, you know, headphones or whatever they are to look at this. And so, you know, we've been writing about this deal originally, you know, for years now, since Zazz, you know, decided to buy Warner Brothers Discovery and figured that this day was inevitable.

0:54And now that it's here, yeah, it's great fun. And you're back in your wheelhouse back in my wheelhouse if only i were getting you know paid like a wall street research analyst who was the axe in his stock her stock that would be great but that's okay money is not that important all right well listen you're getting you're getting you're certainly getting attention and you're making noise so that's worth something right absolutely well the puck is my go too for this stuff and not just the stuff like we've been josh and i had had a beliny on our podcast in los angeles a year or two ago actually we're talking about paris paramount before the ellsons came and swooped it in so you guys you guys do incredible work beliny was a never beliny was a never netflix guy early on they would never do this i never thought they would do this i think most people never thought they would do it they haven't done a deal bigger than 700 million in their history.

1:51So now they're doing a deal for$90 billion? Okay. What was that deal that they even did? I believe it was a producer of content that they wanted. I can't remember exactly what it was. I did write about it, but I can't remember at the moment. It wasn't this, for sure. It definitely wasn't this. All right, guys. I got my sounds. All right. Is that too loud for everybody? He has COVID. Take it easy. Nope. All right. Did I just pass something? You didn't hear anything? And if you're listening to this, by the time you see Bill out in the wild, he will be COVID free. So don't worry. He's getting over it.

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4:04Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Ladies and gentlemen, welcome to the final Compound and Friends of the Year. It's the last one? Yes? Is this the last one we're doing? It is. Oh, we got a great show today. I'm super excited about today's show.

4:40We have here legendary former investment banker, current journalist, Bill Cohen. Bill is the founding partner of Puck, a bestselling author, most recently of the book Power Failure. Bill is also a contributor to The New York Times, Air Mail, Financial Times, Town & Country, so many other publications. and if you're a reader of Puck, you probably are reading something that Bill has found out every single day of the week at this point, it feels like. Bill, thank you so much for joining us. We appreciate it. Thank you, Josh. Thank you, number. Thank you for having me. It's great to be back here. Of course.

5:20And you're remote and just to let the viewers and listeners know, that is because you don't like us that much. You like us enough to pop on StreamYard. You don't love us. But also, there might be a COVID situation, so. Yeah. I really would have thought we were done with COVID, but my wife got it the other day. And of course, surprise, surprise, she gave it to me. And we both had vaccines in September. But mine's a mild case. I'm on tax lovid. This is too much information I know. Yeah, yeah. I didn't want to even feel it, but I did not want to share it with you guys. COVID is like the Avatar movies.

5:57We'll never actually be done with them. It's Michael Myers. We'll never be finished. All right. But Netflix versus Paramount to acquire Warner Brothers, if and when this thing happens, it will be one of the largest, not just media mergers of all time. It's up there on the list. It's a very big dollar amount. And there's a lot at stake here for the future of not just the companies themselves, but for the consumers, for pro sports, for Hollywood, for box office versus streaming, for pretty much every aspect of entertainment is in play here. Do you view it that way? It's as big a story as I'm building it up to be?

6:37Well, I mean, look, it's a big M &A deal. So from my perspective, from a Wall Street perspective, it's a big deal. You know, my partners like Matt Bellany or Julia Alexander or Dylan Byers probably are better at assessing sort of the Hollywood impact of this or the impact it's going to have on consumers. You know, I don't know whether, you know, they might say, oh, you know, Netflix costs you, you know,$15 a month and HBO costs you$20 a month. so we'll give you both for 30 you know for 30 a month instead of 35 i mean they might do that or they might say oh we'll give them both to you for 40 a month i don't know what they're going to do but uh you know i'll let them think about that i am just like laser focused on this deal and the aspects of the deal and uh you know who who might win and where we are now and where it's going and you know to me it's riveting i'm just i'm loving it me too there are the personalities that are at the center of this.

7:38Of course, Zaz being a big part of this and the fortune that he's going to make, whichever deal happens, he's going to do very well for himself. Could Warner, the studio streamer, and the linear network survive? Like, was the debt too much for them that they had to get a lifeline that they are now going to get from either Netflix or Paramount? Look, I mean, we can talk about whether or not Zaz should have done the deal in the first place and the terms under which he had to do the deal, which was he had to take on$55 billion of debt, most of which came from AT &T. That's a, oh man, that is a lot of debt.

8:20But, you know, Zaz's incentive, one of the reasons he's gotten paid so much and will continue to get paid a ton if this gets completed, which clearly looks like somebody's going to buy it. So, you know, he was his incentives, his reward was to pay down this debt. So I always viewed this as sort of a publicly traded LBO, that as soon as this debt got paid down sufficiently and, you know, he's gotten it down to net debt of 30 billion dollars for 55. I mean, that's pretty significant. That's not nothing. I always figured that the equity would pop, just like, you know, even after being stagnant forever and all the other research analysts saying, forget it, it's dead money and it's never going to work.

9:11And I know everybody is sort of running away from this thing. I figured that as soon as that debt got paid down, maybe as soon as that, you know, if they got a credit upgrade, this thing would zoom. I think they did pay down a lot of the debt. But then this process took over. And literally, since then, the stock has gone from the summer from$7.25 to$30 a share. So it's definitely been one of the better performing stocks of the year, mostly probably because of this takeover process. But Zazz did get this in a position to where it's quite desirable. And that's why there are two serious suitors who want to acquire it.

9:52When this was a single digit stock and it was still high 40s billion dollars in debt, I remember the narrative. So let's say this is like late 2023. The narrative was that there was some regulatory reason why they couldn't do a deal. And then that was going to come off roughly around the same time that potentially we would have a change in the White House. Lena Khan would be gone at the FTC and there would be a higher likelihood that a deal could actually happen. So that sort of took the stock from the single digits to let's say the low teens. And then a lot of dominoes fell the right way. And then all of a sudden, Trump comes in and he's not a huge fan, obviously, of all of the things that are happening on these news networks.

10:42So it's not a slam dunk that he's gonna approve a deal unless the suitor is somebody that is Trump friendly or MAGA world adjacent or something. And then David Ellison consummates his deal. They now control Paramount, the most likely merger candidate. And it just all seems like it's gonna go according to this script. And everybody understands that the Ellisons are friendly with the Trumps and they're willing to play ball, look at what they had to do to get the CBS Viacom thing done. But then all of a sudden there's like a monkey wrench and it looks like it turns out there's another suitor. Was that like a bolt from the blue when when you saw that happen?

11:23Did you have any heads up whatsoever that that could happen? What was your reaction to the Netflix proposition or the news that they were even talking? Well, I mean, I've been hearing. From my sources that that it was more than just Paramount. Yeah, that was interested in this. I don't think many people believe that. I'm not sure Paramount believed it, but I was hearing absolutely that Comcast was interested. I mean, I've been talking about NBCU merging with WBD for a year and a half now, picking up on what Tom Rogers first started talking about. I'd heard. So my sources were telling me Comcast, Netflix, maybe even Amazon, to a lesser extent, potentially Apple.

12:15So, I mean, I was certainly expecting there to be more than just Paramount. I am, you know, and I figured, look, you got to remember, Josh, this started back in June. And essentially, Zas put this into play after April. You referenced this technical issue. The technical issue was that you had to wait two years after a reverse Morse Trust deal for there to be no tax implications of a subsequent sale. So that ended in April. Okay. Right. So that was April of this year. And so that – and then in June, they decided they were going to split the company up into two pieces. And that essentially put the company into play.

13:03Zaz recut his options at that point to give him some incentive to get a deal done. And then the Paramount deal closed in August. Literally two weeks later, they reached out to Zaz and say, we're interested in acquiring WBD. so um you know i began them beginning hearing well you know it's more than just paramount here i know they don't necessarily want to believe it but it's true and uh then it came out to be that in fact uh there was netflix in a serious way comcast less so because they've got you know uh more problems than they usually have when there's a big deal uh you know floating around to be done so they made a bid uh but it was uh they dropped out relatively quickly so now we're big at this two-horse race with Netflix definitely leading, but it's not over yet.

13:53When is the shareholder vote? Okay, they haven't set a shareholder vote yet, and it's going to be after WBD produces the proxy statement for the Netflix deal, which is a signed merger agreement, and that's not going to be according to the chairman of WBD speaking on CNBC yesterday. That's not going to be until, late spring, early summer. Oh my God. Yeah. So this is... What do you think? I mean, that doesn't mean... Look, that whole timeline could get completely disrupted if Paramount raises its$30 a share bid. So other than the index funds, Vanguard, BlackRock, so the world, which are the end investors, who are the big parties at play that are going to be influential in determining what the shareholders ultimately end up doing at Warner Brothers?

14:44Well, clearly the Warner... I mean, there are a lot of arbitrageurs now in the WBD stock, and it's not even clear whether those index funds are still in it anymore. You know, we haven't seen a recent filing about who owns the stock. But clearly, it's moved into the hands of the ARBs, and the ARBs are short-term. You know, we haven't had a good M &A arbitrage opportunity in years like this. With a hostile suitor, it almost never happens anymore. It's got it all. I look back and it seems like it was not since 2000 when American Home Products and Warner Lambert had a deal that was broken up by Pfizer.

15:23So, I mean, you know, that's 25 years ago. So this is a great one. This one has it all. And I'm loving it. And the ARBs are loving it because, you know, the stock is basically only going to go one direction from here. Who makes the movie, Bill, about this? Is it Peacock? It's got to be a third party. Yeah, got to be. Or maybe they have like a roller coaster ride at the WB, at the Comcast, whatever it is, their universal theme park that they have. Universal theme park, right. Bill, what did the Netflix executives who visited the White House have to say to Trump World in order to, I'm not saying they got like a wink or a green light, but like clearly they were very comfortable negotiating.

16:09They remain, Josh, very, very comfortable. And they repeated it again yesterday. They remain very, very comfortable with their regulatory odds here, how they feel the regulatory process is going to go. Paramount feels like they're very comfortable with their regulatory odds. I mean, why the heck is the president of the United States putting his thumb on the scale of either one of these deals? It should be relegated to their agencies or the Justice Department. It should not be in the vicinity of the Oval Office. But, you know, we're dealing with a unique individual here. It's the Apprentice M &A.

16:44It's literally that's what it is. Yeah. Bill, where does the decide whether, you know, someone's fired? Right. Where does the$5 billion breakup fee that Netflix will owe, where does that number come from? I'm sure there's some sort of formula. How does that number come about? So first of all, two different things here. There's a regulatory breakup. In other words, if the Netflix deal falls apart because it can't get regulatory approval after any number of lawsuits and judges' rulings, et cetera, then they owe, Netflix owes Warner Brothers$5.8 billion. Wow. Okay. If the same thing happened with Paramount, then Paramount owes Warner Brothers, if they were to go with Paramount,$5 billion.

17:30In the meantime, there's a$2.8 billion breakup fee that Warner Brothers will owe Netflix if they change their recommendation. The board changes its recommendation and goes with Paramount. And Ellison would pay for that, right? Or whoever the buyer is. Michael, that's a very interesting point. One of the things that is really pissing off WBD about the Paramount bid is they have not agreed or said they were willing to make that breakup payment fee payment to. I mean, WBD has to pay that within days of switching, days of switching the recommendation, not when the deal closes. So days. And then the question is, would Paramount reimburse WBD for that in one way or another through, you know, a higher stock, a higher bid price or whatever?

18:24And they have not agreed to do that yet. So that's one of the things that's peeping the WBD board, I think. I saw, I forget it was the president or somebody came out from Warner Brothers and, and kind of like double down on like, we're doing the Netflix deal. The board is, this is what the board is urging shareholders to approve. That was the chairman of the board. That was the chairman of the board. Okay. Yeah. I'm curious if the timing, I, this is like, not, it's not a conspiracy theory and there definitely, there isn't definitely a connection, but there might be. Oracle, which is the money behind the Ellisons, maybe not on paper, but just conceptually in everyone's mind, it's one of the richest men on earth.

19:11Oracle's share price is almost a 40 % or worse drawdown from its high. And that's coincided with these conversations between Paramount and Netflix and Warner. And I'm wondering if that entered the back of anyone's mind, like maybe there's not as much money there as we thought there was, or maybe that's not necessarily the safest bet, given the fact that the old man now has some turmoil back home with his own share price. Or is that just like two things that are not really related, but look like they might be? What do you think? I think it's the latter. I think it's a coincidence. Not a great one, obviously, but it is a coincidence.

19:53Nobody has mentioned it. I haven't heard anybody mention that i mean i think that's related to you know their ai spend yeah yeah it has nothing to do with right it has nothing to do with this right so i mean i think if you look at it you know if you look at the bloomberg billionaires index he's still at like 350 billion 250 billion of which is uh his oracle is 1.16 billion share shares of oracle stock right i think So, yes, that has come down, but don't forget it went way up. Yes. So I don't think it's come down as far as it went way up. So I think he's still better off this year. I think his net worth is up like$75 billion plus this year.

20:35So, you know, he's doing just fine, which is, of course, more than, you know, the$40.7 or$41 billion that they've pledged in equity for this deal. I think the bigger problem, as I've been writing about, is that for whatever reason, which I can't quite figure out. You know, the Paramount guys keep saying, you know, Larry Ellison is going to underwrite Larry Ellison's revocable trust is going to backstop this entire$41 billion of equity. So don't worry about it, guys. It's going to be fine. The equity is there. And the WBD board just doesn't seem to believe that. And part of like this weird technicality, and this is weird, I got to admit.

21:14So the Paramount crowd says that the Larry J. Ellison revocable trust owns the 1.16 billion shares. If you go to the Oracle proxy statement and you look, there is no Larry J. Ellison revocable trust. And then if you look at their 13G filings, there is no Larry J. Ellison revocable trust. so i mean maybe it's a technicality but i gotta you know the wb crowd is saying hey what's going on here is there an error with the sec filing is that a problem or is you guys got a labeling problem so they are looking at oracle's uh stock then like they are paying attention well they're looking at the proxy well who owns the stock okay the stock okay no it's legit the trust is being managed by jeffrey epstein it's totally about i hope they're not looking at the cds i guess would be my well the correct default swaps on on oracle's debt have shot up yeah and that debt is sort of like beginning to look like junk debt which is you know trading like junk debt which is of course absurd uh is you know it probably so maybe it is a factor shot up well i mean i have it could be i mean it certainly has occurred to me i haven't heard anybody say anything about that because again, he's still the second richest man in the world.

22:33And we're only talking about a mere 41 billion out of his$350 billion fortune. So - Bill, do you think that like Oracle, the Ellison, not Oracle, excuse me, the Ellison family are playing games? Like if they wanted it so badly, why don't they just make it? And they're making it clear, but like why play games? Or do you think that they're being straight up and Warner has already decided that Netflix is the buyer? So, you know, now you're into the land of conspiracy theories which I hear a lot of. So, I mean, the Ellison crowd, the Paramount crowd, feels like they are being completely transparent about their desire to own it, how they believe their$30 a share all cash deal is superior, that they've given Warner Brothers everything they want.

23:21Now, there's ambiguity with their$30 a share bid and how it compares to the Netflix bid because of the value of the global network stub, the CNN et al. stub, which you could argue is worth more than Paramount thinks it's worth. And therefore, WBD board was right in going with Netflix at this particular moment. But nevertheless, put that to the side for a minute. They believe that they have been very transparent about the Ellisons backstopping this equity, giving them everything they want. And they don't understand why the Warner Brothers board isn't getting that message or feels like, maybe it's like this thing, like this technicality with the Oracle proxy.

24:01I don't know. But I think there's a sense among the Paramount crowd that maybe the deal, the fix was in and that Zaz wanted to do the deal with Ted Sarandos at Netflix. And it's always been like that. And he can run the streaming and studios business for Sarandos and have a a real job in Hollywood, and he wasn't going to get a real job working for the Paramount guys, even though they did offer him co-CEO. Well, now that ship's sailed, Zaz knows that he's not getting it anymore. Like, David Olsen will definitely fire him. I'm definitely, I'm making that up. Who knows? But what about the aspect of the fact that there's - He also doesn't need a, he's the highest, is he the highest paid person in Hollywood?

24:45No, but without the job. He doesn't actually need a job. No, you don't have the juice without the job. Like, he wants the limelight. Bill, go ahead. He's only 65. You know, he wants to be a player. Yeah. He's going to make$550 million when this deal goes through. Yeah. Bill, what about the three Middle Eastern investments that would be coming in with the Ellison's to own part of a news network? Like that is, that is definitely a part of the story. Yes. But as the, first of all, they're, they're, they're supplying 24 billion of the 41. So that's like 60 ish percent. That's a lot. And I think the three of them together will be the largest shareholder in the combined company.

25:27So that's, I was concerned that that would require CFIUS approval or maybe FCC approval because they would own CBS in effect or be the largest shareholder in a CBS CNN combination. No board seats, but whatever. But to fix that, to fix that, they took away their voting rights and their board seats. So now they've given it all to, you know, the Ellisons and Redbirds. So, I mean, they believe that there won't be a Sipius or FCC problem as a result of that. But, you know, can I stop you? Can I just ask maybe this is a stupid question? Absent board seats and any sort of influence, what is even the point?

26:09If you're Middle Eastern billionaires, they're investing not just for the return. I think we all would agree. They're investing for influence. You wouldn't buy a golf tournament, for example, if the goal was ROI. So what is – or is it a Trojan horse where they'll get the influence later? The most important thing is get the equity today. Yeah, I think that they will use some sort of soft-ish influence. Yeah. They will obviously have direct access to the Ellisons and Redbird has the relationships to begin with. Jerry Cardinal has those relationships. That's how the money came in in the first place.

26:52So they're going to have access to the equity owners, whether they'll be sitting around, you know, the boardroom. I guess they won't be. You know, we all know how this sort of soft influence works. Well, they'll decide on who's the who's the board member. But it doesn't even matter. Well, there's that. And then there's money. Money is power, whether you're on the board or not. Like they say, all right, well, we have another$10 billion for that other deal that we're not going to do. How do you like that? Right. Yeah, they'll have the influence they want. Now, whether, you know, it will rise to the level of needing CFIUS or FCC approval, obviously Paramount is hoping that it won't.

27:27Are you surprised that the White House didn't, at least from the outside looking in, I don't know anything that's going on internally. Are you surprised that the Ellison deal didn't just automatically win because, quote unquote, that was the most likely deal to get approved? Does that surprise you or not? No, no, no, no, no. I think the WBD board is number one, well advised. It's made up of, you know, a lot of deal guys. And, you know, if you look at the final bid deadline was December 1st. If you look at that final bid deadline, it wasn't even close. Netflix had the better deal on the economics.

28:12Then, told that they were going to lose, that's when Paramount threw in on December 4th their$30 a share all cash bid. Now, even a$30 a share all cash bid, the WBD board deliberated and did their valuations, I mean, with their bankers, obviously, and they decided that the$27.75 Netflix bid plus the value of the global network stub was worth more than$30 a share. And I think, you know, in their business judgment, they could arguably very definitely reach that conclusion and no one's going to really scratch their head about it because, you know, the global networks business, you know, of course, Paramount wants that to be valued as low as possible.

29:02So it looks like their$30 bid is the winner. Yeah. So they value it at$1 a share. Whereas Jessica Reeve Ehrlich, at Merrill, who's very reputable, she valued it at$5 and then now at$3. So at$3 a share, that plus the Netflix$27.75 for studio and streaming is worth more than$30. So bingo. I mean, it's not really an economics alone. I mean, there's no point in wondering about the regulatory process. especially when they both say they're equally confident that they're going to get it approved, you go with the one that's got the better economics. And at the moment, that is the Netflix deal. Yeah, you have a fiduciary responsibility to do that.

29:49That's right. And I think that Paramount's been much better at making more noise about their bid. Netflix is quietly saying, hey, yeah, but ours is pretty good. The other thing is that the Netflix bid was exploding. In other words, they said to the WBD board, whatever it was, by midnight on December 5th. Yeah, exactly. And I think they said, OK, this bid is higher. They've given us more of what we wanted in terms of the contract. They're as confident about their regulatory approval as Paragon is. And it's exploding, even if people don't believe it was going to explode. You know, debate whether exploding bids ever explode, but whatever.