Investor Gerry Cardinale on Why WarnerMount Will Work, Middle East Money, and Layoffs

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0:32This episode of The Town is brought to you by The Madison, the new original series on Paramount+. Academy Award nominee Taylor Sheridan's most intimate story yet, unlike anything he's ever done before. The Madison follows a family raised in a world of digital distraction, forced by tragedy to truly see one another and come together. Authentic, multi-layered, and did I mention starring Michelle Pfeiffer and Kurt Russell? Don't miss The Madison. New series streaming March 14th. only on Paramount+. It is Wednesday, March 4th. WarnerMount Week continues on the town as we further digest Paramount buying Warner Brothers Discovery, one of the biggest and most impactful studio mergers in the history of the entertainment business.

1:15We discussed the Hollywood angle with Lucas on Friday. Then we did the Wall Street perspective with Rich Greenfield on Monday. You should listen to both those episodes. Today, it's the view from inside this$111 billion mega deal. What the investment thesis was for the Ellison family, how they plan to pare down that$79 billion debt they took on to fund this deal, whether they'll sell one or both movie studio lots, and if these Saudis and other Middle East investors will be among those backers. Lots of questions, so we've got the chief architect of this deal back on the show to discuss. Jerry Cardinal is the founder and managing partner of Redbird Capital.

1:55It's the private equity fund that backed Skydance and then Paramount Skydance and now the takeover of Warner Brothers Discovery. Jerry does a lot of other deals, too, especially in the media space. He's arguably the biggest and most influential dealmaker in the space right now. He's agreed to let me grill him on the contours of this transaction. Why he says the coming cost cuts will not primarily focus on employee layoffs. and ultimately why he and David Ellison believe this mega deal is good for Hollywood. From The Ringer and Puck, I'm Matt Bellany and this is The Town.

2:30Okay, we are here with Jerry Cardinal, who is the founder and managing partner of Redbird Capital, also a Paramount Skydance board member. Welcome back. Good to be here. You survived the first outing on the town and you dared return for another grilling by me. Well, we had fun the first time around. We did, yes. No, it's all in good fun. So let's talk about this company. I have many, many questions about this deal, about this company that you have now formed, about all of it. The debt question. I've heard people already referring to this company as debt mount, debt bros, paradet, sky high debt,$79 billion in debt attached to this company.

3:20How is that a surmountable hurdle? Well, look, I mean, on the surface, you know, that amount of debt is a large amount of debt for any company. But our cash flow is also a large amount of cash flow for any company. You can't talk about debt in a vacuum. Leverage is an important corporate finance tool for growth to enable cash flow generation. And cash flow generation, there's a circularity. Cash flow generation enables you to take on debt and pay it down. So we have a tremendous amount of cash flow generation in the assets that are coming together here. You know, one of the reasons why, from an industrial logic standpoint, you know, Paramount, Warner Brothers coming together and our ability to buy the whole company was so important was that it unlocks tremendous cash flow and synergies.

4:13That all gets reinvested back in the content and it also helps us delever. So, you know, when we close, you know, we will have net leverage of 4.3 times. That's why you have to link cash flow and leverage. Not seven? I thought it was seven. 4.3 times pro forma for the$6 billion of synergies that we have underwritten. So you're accounting for the$6 billion you're taking out of the company. I'm giving us 100 % credit for those synergies we've shown. First of all, this is what we do for a living. Number one, it's not just spreadsheet math. Number two, in the short track record that we've already established with Paramount, we've shown an ability to execute and outperform on synergies.

4:56So this is not just deal jockeys playing spreadsheet math. We got a real, you know, don't forget, you know, the industrial logic of this whole thing is led by the owner operator model. And I said to you before, that is important, not only important for alignment, the fact that the Ellison family and we will be the largest shareholders in this pro forma entity is very instructive. We are putting our money where our mouth is, and therefore we're wholly aligned with shareholder value creation. You can't do shareholder value creation unless you're driving revenue and you're driving cash flow. You can't do that unless you're reinvesting in the business.

5:32And that all leads to the derivative effect of providing real value creation for not only shareholders but subscribers. So the whole thing is connected. How is this different from the Warner Brothers Discovery leveraged buyout, which essentially is what that was? because they had some pretty lofty predictions of where their revenue would be and that they would be able to pay down their debt. And almost from the get-go, those revenue projections came in below what they were forecasting due to the same headwinds that you guys are up against. The linear television model is collapsing, yet you make most of your money on the linear television model.

6:11So how are you distinguishing this? and how is this not just a supersized version of warner discovery which was not working to the point where they had to sell well look as you point out i mean synergies were not the problem in the original warner discovery merger i mean they guided to three billion of cost savings up front by the end of 23 you know they were looking at four billion in realized savings excluding content so you know cost savings the challenge for that deal is that the cost savings were offset as you know, by declines in their linear revenue, right? I mean, they started 24 billion down to 21 billion.

6:45Yeah. But how is that different from you? You've now inherited that melting iceberg and you now have all of these other cable networks that you're throwing on top of it. Right. Our linear portfolio is not comparable, number one. And importantly, it includes CBS. The CBS broadcast network, as you know, is best in class. Eight of the top 10 shows on TV are our shows. And that reach will continue. That reach is, you know, very synergistic in terms of the partnerships that we have on the programming side, particularly with live sports and news. You know, our sports portfolio is best in class at Rivals ESPN.

7:21It's about to get a lot more expensive with the NFL, though. Sure. And that's why, you know, this is all connected. You know, you've got to invest in content. Sports rights, like all other content spend, are continuing to go up. And we've got to be able to run this whole pro forma entity, you know, very efficiently to be able to continue to compete and reinvest in the business. And so I like the fact that, you know, we're buying the whole company. It gives us real foundations for synergies, both on the revenue side, on the cost realization side. CBS is the crown jewel in the linear portfolio. And that is why we're different than what, you know, Warners and Discovery had to deal with when they did their deal.

8:02So Fitch just downrated Paramount's credit rating to junk after this deal. Ted Sarandos called your deal irrational. Greg Peters told the Financial Times he can't make sense of this deal that you did. And this is his quote. And if Netflix can't make it economically viable, I don't know how they can. So I am, quite frankly, a little bit nervous for the industry. Care to respond? Sure. What I would say there is that the, you know, the sour grapes tour is amusing to a point. But, you know, I don't let guys with no track record in the areas that are instructive here be the pace car for the narrative.

8:44So, you know, Netflix, if we want to look at apples to apples, Netflix has no track record in any kind of large-scale M &A. Oh, how dare you? The Roald Dahl estate was a huge deal for them. Yeah,$700 million is not a$110 billion deal, number one. Number two, 70 % of what they carry content-wise is licensed, as you know. They don't even do their own distribution. Amazon does it. They don't want to make content for theatrical. They want to basically, their deal, the North Star and their deal was just really killing competition. They have a great business model. They don't need to kill competition.

9:22Our deal actually creates competition. That's what it's always been about. And, you know, when you look at the narrative here, which is very interesting, is, you know, they wanted to shift the definitions to TV viewership. This is about direct-to-consumer. Direct-to-consumer is about pricing power. You've got pricing power both at the consumer level and you've got it on the content supplier level. We're going to open that up and we're going to really reinvest in the content. This is a shot in the arm for Hollywood and for content. But how do you do that? How do you reinvest so much when the first couple of years of this are going to be about debt reduction and cutting costs?

9:58Yeah, but Matt, you know, cash and capital are fungible. So these things are not, you know, bifurcated into all debt reduction, all content spend. The money's fungible. In our job, every dollar of cash flow we generate, you know, will go to debt reduction and content spend. Those two things can exist very synergistically. Our job is to run the business more efficiently than any content production company in Hollywood has ever been run. And again, you guys can do this in a way that others who have tried this cannot. You have a 43-year-old CEO who has never done this before, and he's going to do it where others have failed.

10:41Yeah, well, when you say never done this, he's got a 15-year track record, a 16-year track record having built a very dynamic content production company like Skydance from scratch in the short time that we've had Paramount. Look at what we've done. And then you've got to look at, I've always said, particularly in these content businesses, you're only as good as the people you put around you. And if you look at what we've done, I mean, we hired a former meta executive, Dane Glasgow, as our chief product officer. We're going to be a real destination for top tech talent. It's the first time really in Hollywood that you've seen that kind of Venn diagramming between Silicon Valley and Hollywood.

11:20Well, Netflix would beg to differ there. I think Amazon probably would as well. I don't think Netflix is the standard for technology. We're taking it up to a real standard. But what does that mean? You guys have, and I've made fun of this as the sort of Oracle pixie dust. What does that actually mean? Well, look, we've got our Oracle Fusion implementation going on that's going to consolidate finance in our HR systems. That's on schedule. We're going to make sure we really lean into the backend convergence of Paramount Plus and Pluto. We're transitioning to studio in the cloud as a model to accelerate content creation.

11:55So all of this is going to be built on the Paramount tech. The Warner Discovery tech is going to go away. Matt, you know, Paramount had no tech, okay? We are putting that in place. So this is going to all be predicated on the synergy and the industrial logic of the Ellison family and Redbird and the way we build businesses, the way we embrace technology. Look, what's the investment thesis in Hollywood largely defined? The investment thesis in Hollywood is you've got to embrace technological disintermediation if you're going to level the playing field for the good guys, the content generators. The IP in the equation here from an investment thesis standpoint is the IP.

12:35It's the content creation. And Hollywood has never had a fair shot at leveling the playing field with the guys who think they're the IP, which is the distribution side of the equation. And a lot of that comes out of Silicon Valley. A lot of that is driven by direct-to-consumer and streaming. But now what we're doing, we're going to really lean into content generation. It's not only going to be derivatively beneficial to consumers, both from a diversification standpoint, they should be able to get everything that they want in a very easy way. But it's going to be great for content suppliers because it's going to be a shot in the arm to Hollywood in terms of running these businesses the way every other industry runs them, with driving revenue growth, driving cost rationalizations, driving cash flow generation.

13:20Those are not bad words. Cost rationalization is not a bad word. These businesses have not been run cutting edge the way every other industry has had to get their head around technological disintermediation and evolution. We're going to do that. And that's why this is going to work. When we talk about the synergies, Matt, the inference here is that it's all going to be labor. We're going to be firing. That obviously is of interest to people in Hollywood. They see this horizontal merger and horizontal mergers equal layoffs. But Andy Gordon, your COO, says no, it's not primarily employees. How is that possible?

14:02The majority of our synergies that are cost-related have nothing to do with firing people. Then what are they? Okay, let's go through it, okay? Follow me on this because I'm going to give you the answer and the devil is always in the details. Guys can BS all they want. At the end of the day, all of this is sophisticated and needs to pay attention to the details. Number one, I got a few buckets here on how we're going to drive synergies and it's real stuff. OK, and there's a whole business plan around this that we've developed. Number one, we're going to consolidate our streaming technology stacks and our cloud providers across Paramount Plus and HBO Max.

14:41By the way, that's the same plan as we're executing at Paramount right now and consolidating the tech stack of our three streaming services, Paramount Plus, Pluto and BET Plus. So that's number one. Very important. Number two, we're going to optimize the combined real estate footprint and corporate overhead. Same plan we're executing at Paramount across excess office space and redundancies and back office. Does that mean selling one or both of the lots? No, we're going to keep them. You're going to keep both? We're going to develop them more efficiently, yes. What does that mean? Condos on the Paramount lot?

15:13No. What does that mean? No, no, no. We're not real estate developers. I'm just asking the question. There was a rumor that Larry saw this as a real estate play to make a couple billion dollars on the lot. OK, well, then anybody saying that doesn't know Larry and it's just complete garbage. So you're keeping both lots. Everything we're going to do is going to be synergistic around the pro forma company. So we're not going to do that. But, you know, again, we're still we'll work through. And when we have something to announce, we'll announce it. You should assume that we're keeping that footprint and it's all going to be utilized for the benefit of IP monetization.

15:48across the whole flywheel of IP monetization. But you are confirming right now that you will not sell the Paramount or Warner Brothers lots in Hollywood and Burbank. That is correct. That is the intention right now. Look, there's a lot of global efficiencies we can drive in procurement and in just general business services. Again, we've shown already in the short time that we've owned Paramount, Now, we've demonstrated significant savings by leveraging the benefits of scale and purchasing from vendors across IT, travel, all the stuff that the well-run corporate enterprise world takes for granted, we're now bringing to this.

16:26OK, so that's another area. Then there's efficiencies in marketing, optimizing spending on agencies and tooling. Again, you know, Paramount, you may have seen, we announced new agency partnerships, and that drove a tremendous amount of savings and better analytics for allocating marketing dollars. And then importantly, you know, we're migrating the combined company to a single enterprise resource planning system. I mean, this is stuff that, you know, a lot of companies today take for granted. Really, you know, you don't really hear. Listeners might be snoozing through this because it sounds it sounds very like back office.

16:59But if what people will care if this is where the six billion comes from and not wiping out an entire distribution arm or wiping out an entire creative arm. Absolutely. That is the point here. And that's why it's completely disingenuous to have, you know, guys like Netflix or others just just lobbying in over that. They have no track record in this. Nobody can speak to this level of proficiency and expertise in these kind of, as you call them, back office things that are incredibly important in terms of the infrastructure of IP monetization the way the Ellison family can. Right. And keep in mind, you know why that's important.

17:37I'll say that I said it last time and I'll say it again. And this is not just us talking our book. This is the first time since Walt Disney that you've had a family in an owner-operator model putting their money where their mouth is to drive innovation, content spend, and reinvigorate that whole IP monetization flywheel. That's why this is significant. And you can't do that with just a bunch of words. You have to go in and actually execute and implement. So those buckets I just took you through are instrumental to that. That's why, you know, the soundbite that, you know, the misinformation campaign that, you know, Netflix, you know, is continuing to do is, you know.

18:1416 billion. They say you have to cut 16 billion. Yeah, well, of course, you know, they don't. Once again, they're talking about things they don't really know. We know how to manage cash flow generation and leverage. Okay. You, you, but it's not just the Ellison family. Back in December, you announced that a consortium of Middle East money, Saudis, Qataris, Abu Dhabi, they are in this deal to the tune of$24 billion. But these entities were not in the press release announcing this deal. Are those Middle East backers still in this deal? Look, the Ellison family and Redbird are backstopping the entire$47 billion of equity.

18:55No, I get it. But are the Middle East investors still in this? We haven't syndicated anything at this time. We do expect to syndicate with strategic domestic and foreign investors. But at the end of the day, that alchemy shouldn't matter because it'll be done in the right way. But at the end of the day, it doesn't matter because Ellison and Redbird are backstopping the whole thing. I get it. But you understand why people might be concerned about Middle East money having an ownership stake in a company that owns CNN. Well, OK. Okay, so do we want to be a global company? You answer that question.

19:31I don't care. I think we want to be a global company. Okay. You look at what's going on right now geopolitically. What's going on right now geopolitically out of the Middle East wouldn't be, the positives of that would not be happening without some of those sovereigns that you're referring to. Okay, the world is changing. We can stick our head in the sand and pretend it's not, or we can embrace globalization and the derivative benefits, both geopolitically and otherwise, that come from that. Content generation coming out of Hollywood is one of America's greatest exports. I firmly embrace the global nature and orientation that we bring to this from a capital standpoint, from a footprint standpoint, et cetera.

20:08At the end of the day, I do understand some of the concerns that you've raised, but that will work itself out between signing and closing because at the end of the day, worst case scenario, Ellison and Redbird aren't 100 % of this thing. Will these global, you call them, investors get board seats? uh you know right now the way we set it up is i don't know right now i i think that you know previously you said no that the middle east investors would not get board seats now you're saying maybe no that's the premise on we're going on right now but i haven't revisited that since the last time we talked about it what's important is the lead here from a governance standpoint is ellison and reverend none of that changes that's how we set up paramount skydance and that's how this pro forma will be set up but you understand why middle east investors having a board seat on a company that owns CBS News and CNN might be concerning to certain people.

20:58Yeah, and I gave you the answer to that just now. Okay. Our guy, David Zasla, will he have a role at this company? You know, we're talking to David. We offered him a role early on in the conversations before we had to buy the company. You also basically accused him of committing fraud in the process and said that this was not a fair process. and you guys had some very harsh words for the Warner Discovery people that went with Netflix over you guys. Well, that's not, first of all, I never accused them of committing fraud. I have a tremendous amount of respect. You did not. You're right. But it was, it was on the border.

21:34No, I think, I think what we were talking about was, look, we had to buy this company 10 times. Okay. And the difference between our December 4th offer of$30 a share and$31 a share is, you know, less than, you know, 4%. So, you know, you got to look at that and say to yourself, you know, when Netflix says that they were price discipline and the reason they walked away because they were price discipline, you're telling me price discipline is a dollar a share on a$110? Well, you guys wanted to buy this company for$19 a share at the beginning. And at the end of the day, that's the, thank God there's, you know, I understand there's rule of law and there's competition.

22:14Our issue was that the offer we made December 4th, Isn't that much different than the offer today? We perfected the deal. Ultimately, the board came around and did their job in engaging with us. All we asked for was engagement. They did their job in engaging with us. So bygones. Well, that led to, again, I come back to the three criteria that we always focused on, value, timing, and certainty. and in the interactions between december 4th and last week you you had you know value on the margin came up a bit but it was really around timing and certainty and that whole package made you know i always said to you you can't just look at the value you got to look at risk adjusted value risk adjusted is timing and certainty and that's why we prevailed yeah we're not going to get into the regulatory stuff we've discussed that extensively i think you guys are pretty much in the clear federally states and overseas maybe not as much but so you're open to having zasloff and his team have some role at this company is i'd say david the two davids are going to be speaking a lot uh david zasloff's been terrific in embracing you know us at this point and and really helping us think through all the things that we have to do to his credit well you're making him 800 billion dollars personally he is and look what i tell you to his credit david zasloff is a man of the people he really cares oh he's a man of the people oh my god please don't say that just he cares no honestly he cares about his people i've talked to him directly cashed out 114 million dollars of shares yesterday as all of his employees are freaking out about their own jobs come on not a man of the people i'll let you cover that in the podcast deal maker absolutely but not a man of the people all i'm saying is that uh you know he's been he's been very focused on making sure that you know his people uh are integrated in the right way and he's going to work closely with us and so we'll let the two davids deal honestly you should bring in gunner the cfo if if your goal is cost cutting he's your guy by the way nobody believes you guys that you're going to make 30 movies a year for theaters why is that because it's really effing difficult to do that at that scale.

24:30But Matt, once again, here's the problem with the soundbite ecosystem that we live in. We're already doing more than 30, okay? When we bought Paramount, it was doing eight, and we're on track this year to do 16. Okay. And then Warners will be 14 to 15. So we're already at the 30-31 level. That's not the issue. That's not the thing to focus on. Both of the studios can do that. What's instructive is the cost side of it and how we rationalize the ability for us to continue to lean into that kind of content. I agree because it's easy to I shouldn't say you can't make 30. Netflix has been doing that, but it's difficult to make 30 movies a year that justify theatrical releases with big marketing spends.

25:12And if that is the plan, it's it's really difficult to do that. And ultimately, you're going to be competing against yourself some weekends. We are not daunted by that at all. This is about, again, this is, you can do it. The question is, how do you enable it to be consistent? You can't, the budget we inherited on the original Paramount slate, you know, it's one of the worst movie slates that we've seen, right? Well, they were hampered by uncertainty and a lack of resources and IP. Yeah, look, I think the eight films we inherited, the theatrical releases, I don't think any of them were hitting budget.

25:50So, you know, we're turning that on. Well, Scream 7 did pretty well, but that's Spyglass. That's what I'm saying. Not only have we turned it around, look at the first thing we've had right out of the gate that we can call our own. Yeah, that's a big win. Yeah, it's the largest win on the horizon. You guys don't own that one. That's Spyglass. But it's still a big win. That's a huge win. This episode is brought to you by the Walt Disney Animation Studios Zootopia 2. Now nominated for the Academy Award for Best Animated Feature, The Hollywood Reporter hails Zootopia 2 knocks it out of the park with its dazzling visuals, sophisticated humor, and genuine emotion.

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26:43Speaking of your guys, Jeff Schell, your president, came from Redbird. He's now under investigation for allegedly leaking company information. Is Jeff Schell part of the future of this company? Look, I'm not going to get ahead of that right now. So I had nothing to say on that right now. I have a tremendous amount of love and respect for Jeff. He's very talented. We got to look into this internally, and I'm going to leave that to the senior management team. I can't comment on it. So I want to, what is your message to Hollywood as the chief dealmaker behind this transaction? What do you want to communicate to Hollywood about the fear and the kind of anger that has swept through the industry since this was announced?