Paramount Isn’t Giving up Warner Bros. to Netflix Just Yet

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0:43Called A Stunning Portrait of Love by Variety, Love Story is Emmy-eligible in all limited series categories. Now streaming on Hulu and Hulu on Disney Plus for bundle subscribers. It is Thursday, December 18th. Quite a development in the saga of who will buy the Warner Brothers Discovery Studio. The board of the company didn't just reject the hostile takeover bid from Paramount. They kind of eviscerated Paramount and the Ellison family in the process. The 83-page SEC filing offers the Warner's version of events that led to Netflix announcing its$83 billion acquisition of the studio and HBO Max on December 5th.

1:19Remember, Paramount is now pushing a hostile bid of more than$100 billion for the whole company, including the TV networks that are the subject of debate over how valuable they will be on their own. In the new filing, Warners called Paramount's$30 per share offer inferior and inadequate. The Ellisons, quote, consistently misled them and repeatedly failed to incorporate critical feedback regarding its equity financing. The bid was portrayed as messy and filled with red flags. By contrast, they say, the Netflix offer of more than$27 in cash and stock for just the studio and HBO Max, which Warners ended up accepting, was a, quote, clean bid without questions around who is ultimately accountable and without Middle East money.

2:01That's a key point. After all, the Ellisons are putting in only$12 billion of equity. I say only as if$12 billion is only, but it's only$12 billion in equity in their bid. and they recruited funds in Saudi Arabia and Abu Dhabi and Qatar to put in additional money, about$24 billion, double the amount of the family, though the fund associated with Jared Kushner has since dropped out. But that is the Warner's side of the story, as I said. And now, here on the town, Paramount is responding. Jerry Cardinale, the founder of Redbird Capital and a longtime backer of David Ellison's Skydance, and then Paramount, and now the bid for Warners, he says that the whole Warner Brothers missive is a big red herring.

2:39Larry Ellison is all in on this deal, he says. And despite the noise, its$30 per share offer is all cash, thus a better deal for shareholders. Ellison and his backers are still pushing for a shareholder vote. They had people at the White House this week pressing their case there. They're confident that if this is all about money and the ability to close this deal, which they say it's supposed to be, they will win. So this has become a real standoff and increasingly nasty. Jerry's in the middle of it all, and he's got some choice words for Netflix and Warners. And of course, I asked him whether the Ellisons are prepared to increase their bid.

3:13So today it's the Warner Brothers rejection of the Paramount bid. Plan to fight back. And what's left for the Ellisons to do? From the Ringer and Puck, I'm Matt Bellany and this is The Town.

3:28All right, we are here with Jerry Cardinale, who is the founder and managing partner of Redbird Capital Partners. and in the middle of this Paramount Warner Brothers Netflix standoff. Welcome, Jerry. Good to be here, Matt. All right. I appreciate you coming on the show today because the Warners filing yesterday was pretty scathing. I mean, I haven't seen a whole lot of these in my career. I'm sure you've seen meaner ones in yours, but they walked through their version of events here, And it was a portrait in their eyes of a bid that was messy, that had a lot of questions around it, specifically about how much Larry Ellison was willing to backstop this deal and put up his own funds to make sure that it happens.

4:21And there were miscommunications and lawyers firing off letters when other bankers involved didn't know they were doing it and said, we didn't support that. So just give me your sense overall of what they were doing here, and then we'll get into more of the specifics of some of the claims. Well, it's all a false narrative. It's all a bunch of red herrings. Okay. Tell me why. Because at the end of the day, the fiduciary responsibility here is to deliver the highest value and certainty to Warner Brothers shareholders. So please tell me that$108 billion deal is not going to rise or fall based on this kind of lack of communication and based on these kind of clerical issues.

5:04I mean, when you step back and you look at what the crux of their argument is for why they didn't entertain our sixth bid when we had five bids prior to that and a track record of addressing all of their concerns and then just all of a sudden accelerated and went exclusive with Netflix. And then in the cold light of day, you see the two proposals side by side. And it is clear that our proposal is superior. Our proposal is all cash at$30 a share for 100 % of the company, and we have a cleaner regulatory path. There is zero extrapolation, zero conjecture that needs to go on with our bid. You look at the Netflix proposal, and to be quite honest with you, you need 3D glasses to understand it.

5:50Just as a starting point, our offer has got$18 billion more in cash than their offer. Their offer is both stock and cash, as you know. And the value of the stub and the TV agreement. We don't need to get into the disputed value of the TV networks. You guys say they're not valued very high. Netflix says they are valued high. Well, it's actually a really important point because not only do you have, you know, the Netflix stock component for studio and streaming where it's already lost shit, 120 something billion of market cap and it's below the low end of the collar. But you got this completely moving target on the spin co.

6:26and that is more of an issue than anyone has articulated. Not only is it a complete conjecture as to what it would trade for, right? And what the value is. And it's remarkable to me. I should say that everybody talks about this. You guys in the press talk about it. The Wall Street Research talks about it. We talk about it. The only constituent in this entire equation who doesn't talk about the value of the spin co is the Warner side. Now, why is that? Well, why is it? You tell me. Let's talk about it. The chairman of the board went on CNBC this morning and made a passing comment about$3 to$5 a share.

7:04Well, first of all,$5 was in a single research report a couple of months ago. The B of A, yes. None of the others have gone that high. Right. And then that one research analyst revised it down to$3. The problem is when you look at the leverage that's put on the SpinCo. The debt being put onto the CNN TNT group that's being spun off. And you have to extrapolate what that debt is. When you look at the total debt that is projected at the time of closing, and you look at the debt that they're putting on studio and streaming, you extrapolate that there's about$15 billion of debt put on Spinco. For that group of assets,$15 billion of debt is about four times leverage.

7:46Now, what's interesting is you have an immediate comp out there right now in pre-trading called Versin. Sure. The Comcast network's being spun off. Correct. And it's a better portfolio of assets because it's anchored by live news and live sports. And now that has 1.25 times leverage, right? And it's trading at four, four and a half times. So think about that. So you think that these networks are not worth what they say they are? The way they've capitalized it. I mean, look, the great thing about all of this stuff, math is math. I'm a math guy, okay? The EBITDA is the EBITDA. Yeah. But the market sometimes does interesting things with the math.

8:23That's fine. But for you to get to$3 a share, our math gets us to$1 a share. To get to$3 a share, this thing has to be traded six times. And that is such a key issue because the value of the various bids, of the two bids, are contingent on what the value of the leftover is. We get that. Well, it's actually worse than that, Matt. So get this. So let's say$15 billion of debt. It's four times leverage. So let's say you dial that down. Let's say you can't get all, The spin code can't happen at that kind of leverage, which is what I would suspect. So let's say you just take it down to two and a half times leverage, which is still double what the versant leverage is.

9:01So you take$5 billion off of it, and that$5 billion has got to move over to studio and streaming. You know what happens then? What happens then is that the shareholder value in studio and streaming gets squeezed because the cash amount to the Warner Brothers shareholders for studio and streaming, the value that they put out there on that gets squeezed. because the enterprise value stays the same. And so then you have a situation as follows. By moving, just illustratively, if you move 5 billion of debt, take it from 15 to 10 from Spinco and put it over to studio and streamings, effectively what will happen is that Warner Brothers shareholders will trade$2 a share in cash from studio and streaming for$2 a share in Spinco stock.

9:46That is what is going to happen. And that is not a good trade for Warner Brothers shareholders for a declining asset that is massively over levered, especially when you've got the person comp out there. So no one talks about that. It's not just this kabuki around what is the spin co gonna trade for? It's the impact on the studio and streaming value. Arguably, CNN is a premium asset that would have added value, but I don't wanna get into that. I want you to specifically address some of these concerns that were raised by Warner, specifically the Larry Ellison aspect, because over and over, It seems like they were really pushing for a personal commitment from Larry Ellison to backstop this deal, and it didn't happen.

10:28Why won't Larry simply put up 40 billion of Oracle shares into escrow with his signature on it and guarantee this deal like Elon Musk guaranteed the Twitter deal? Okay, well, this is where everything gets popularized, and it's once again a false narrative. Larry's assets are all in the trust that we put up to backstop this. Okay. And that trust has$250 billion of value, including, you know, mostly Oracle stock. Okay. That's six times coverage on the 40 billion of equity that the Ellisons and Redbird have backstopped. But is he on the hook for that? If this goes wrong, he's on the hook for that.

11:11This is the point. Okay. The equity backstop, and this is an underwriting structure that is ubiquitous in finance, guarantees the financing is available at closing, not only because it's backed by the$250 billion of assets in the trust. By the way, this trust has been a counterparty in other completed public company transactions, including Twitter and Paramount, which, by the way, on the Twitter deal, that involved one of Warner Brothers' advisors, Wachtell Lipton. right? The equity commitment papers that we submitted to Warner Brothers were identical in all material respects to commitments that the advisors to Warner Brothers had agreed to in other large transactions such as Twitter and Electronic Arts.

11:55So the notion here that, first of all, if Larry offered the personal guarantee, it wouldn't have the teeth and the backstop that the trust has because his assets are all in the trust. So they asked for a backstop with teeth, we gave it to them. I don't care about the clerical error and that there was on the proxy. It was just Larry Ellison. Like, I get that. That seems like a made up sort of like semantic thing. Assuming it's the trust is the responsible thing, though. Why, if you say that Larry is fully prepared to go all in on this, why is the Ellison family only putting in 12 billion dollars of equity?

12:30And you've now recruited three Middle East funds to invest double that 24 billion. Why? It's funny to hear you say only$12 billion. I mean, you are getting the B in billion, aren't you? I get it, but this is a$108 billion offer. I understand that. But the Ellisons will be the largest economic owner. Let me just step back for one second, and I will get right into the answer to the question. This is an owner-operated model. I've said before that this is the first time since Walt Disney that you've had a family own control of one of the majors. He's the largest economic owner in Paramount. He's the largest economic owner in this pro forma deal.

13:09The Ellison family and Redbird have 100 % governance control. And, you know, I put that up right up against how much does Reed and Ted have ownership in Netflix? Not that. Exactly. And how much does David Zaslav have in one of those? I get it. I mean, we don't have to get into whether the Ellisons are good stewards of this company. That's a whole separate question. I want to talk specifically about the deal, though, because that's what is at issue right now. Why did you recruit these three Middle East countries? They weren't disclosed in the first offer. Then they were in the December 1st offer.

13:44Why did you go and recruit these? My reporting suggests that you and Ari Emanuel and David were out in the Middle East getting these investors on board. Why did you need them if the Ellisons have no problem covering this? Once again, it's a false narrative. When you go from$19, where we started was$19 a share of cash in stock. based on addressing all the feedback from the board. They kept giving us hurdles to jump through. We got to$30 in cash for 100 % of the company. When you go from 19 a share in cash in stock to 30 all cash, despite the fact that Ellison and Redbird are backstopping, saying it is prudent to get partners, right?

14:23This is the largest private equity financing deal in history, right? Every other deal, nobody has any problems when KKR and Blackstone and TPG all clubbed around a deal. No, I get it. But you have to understand the Saudis are different. That is a regime that has a history of anti-media activities. Them owning even a piece of the company that owns CNN is problematic to a lot of people and potentially hurts you in the regulatory process. Yeah, look, we're not trailblazers on that, okay? You know, the current administration has sort of blessed these, has encouraged investment from all three of these countries.

14:56You know, we're not trailblazing with regards to Saudis, right? And you haven't made them any promises about any involvement in anything? Absolutely not. We don't need to do that. We will be the largest economic owner in the overall business, and we own 100 % of the governance, right? And so there's no involvement there. This notion of soft power is antiquated. The administration has asked these countries to invest in the U.S. They've given the Saudis a special investment designation. Saudi Arabia is one of the biggest purchasers of U.S. goods from Boeing to GE to AWS. West. JP Morgan, Warner Brothers' core advisor and lender, is the reference bank in Saudi Arabia.

15:36It's operated for decades in Saudi Arabia. Why the Middle East people, though? I mean, I know you have relationships there, but why there? Is that just where the money is now, that if you want to do an entertainment company, you go there? These are the three most sophisticated sovereign wealth funds in the world. And when you get to a level of$108 billion, I look at it. And even though I'll say this to you, even though I don't outsource my investment committee to third parties, the fact that the three most sophisticated sovereign wealth funds in the world and the most sophisticated private equity firm in the world, and Apollo, who's in the debt alongside B of A and Citi, have endorsed what they're there for two.

16:13They've endorsed two things. Number one, they've endorsed our business plan. And number two, they've endorsed Ellison and Redbird executing that business plan because we own 100 % of the governance. But you initially did not have them as giving up their voting rights. You initially had them as having voting rights, and then you changed that once some objections were raised, correct? Correct. And so once again, you just proved my point. We have shown very tangibly a track record of addressing the board's concerns. And that's why we're now at our sixth bid here. Yeah. Why six? Why not just come in with it all from the beginning?

16:48Why it goes incrementally up like this? Because it's like rope-a-dope. They keep giving us hurdles to jump through. and it seems to me without ever an intention of actually getting there with us and the thing that proves that we went from december 1st we addressed their issues we offered the backstop we went to december 4th and there and heard nothing crickets right and and you can't tell me on 108 billion dollar deal with this where the second richest guy in the world is backstopping this with us and owns and is the largest economic owner of this you can't tell me that and when you look at these bids next to each other you can't tell me that you're going to go immediately to exclusivity with Netflix when their offer is a moving target.

17:27Well, they say that Paramount was told that it couldn't improve its offer after December 1st. That's not true, you're saying? Well, their actions speak louder than their words. They came back to us after December 1st and said, you got to address these things. And there was the text exchange between the two Davids where he said, this isn't best in final. And then we didn't hear anything. But the important point here is that the board has a fiduciary responsibility to get the highest value. and part of highest value, you've got to risk adjust that. Okay. The whole regulatory thing is about risk adjusting the economic part of the proposal.

18:00Okay. And so when you look at that, you cannot say that 30 a share, all cash for a hundred percent of the company with a much cleaner regulatory profile, you cannot say that that is inferior to their - We can debate the regulatory issue. I agree with you that it is likely an easier sell to the government, the combination of two studios, rather than making the largest streamer even bigger with the fourth largest streamer. But you're selling in part, or at least by implication, the Trump relationship. And Netflix has a Trump relationship too. And Trump has not picked a side on this one, at least not publicly.

18:40I don't think we're doing that. You don't think that you're implying that the Ellison's relationship with the Trumps is going to help you in the regulatory process. You guys in the media say that, right? This is very, let me tell you something. The discipline in this commentary around this deal is very, very simple. It's about delivering highest value and certainty to the Warner Brothers shareholders. That is it. Okay. Now you, now highest value and certainty means you have, the only thing, our deal has no extrapolation in it. Zero. Okay. We're creating competition. The North Star on the whole investment thesis is on the streaming side.

19:15Okay. We're creating, our deal creates a three horse race. Okay. In streaming. Yes. Between Netflix, us pro forma with Warner Brothers and Disney. And whatever Amazon is doing, but we won't count. That's true. But their deal at 420 million pro forma subscribers, 43 % market share that kills competition. It's over. And that is why, you know, I've been doing this for 35 years. And any time you look at the constituents in the value chain and any time you see all of the constituents in the value chain, you know, raising their concerns unanimously. And I'm talking about talent, content creators and the theatrical exhibitors.

19:50They're all going bonkers over the possibilities of this Netflix deal. That tells you that the starting point is a monopolist. Do you don't believe Ted when he says that they will continue to release Warner Brothers movies in theaters? I think he said he's doing it for two weeks on a limited basis because he'll check the box No, no, no, he didn't say that He initially said that they would evolve the model to be more consumer friendly after time and then he made a surprise appearance in Paris this week where he committed to honoring the windows that are currently in place on Warner's movies I think he did that in response to the backlash Sure, and I can't believe you guys don't give him more grief about that than you do about this Oh, he gets plenty of grief.

20:33I think people think that the Hollywood people are over-emphasizing the theatrical issue. That for the general public, the streaming issue is the bigger deal, but for the people in Hollywood that like to see their movies in theaters, it's a bigger issue here. I think it is. It's a very important part of Hollywood. And the good thing about David Ellison is that he comes, he is Hollywood. He is passionate about Hollywood. He is passionate about filmmaking. I mean, the guy got into Harvard and Stanford and turned it down to go to UCLA film school, USC film school, rather. And so, you know, he really bleeds this.

21:11He loves it. And, you know, he sees this as, you know, an incredibly, you know, fork in the road moment for Hollywood. Yes, he has explained that in meetings internally. I do understand that.

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22:06Built for creators of every kind, Firefly helps you generate, edit, and experiment fast. Because the asks aren't getting smaller, the budgets aren't getting bigger and the timelines, oh yeah, still tight. With all the best creative AI models in one place, Firefly brings your ideas to life. Unlock a better way to make with Adobe Firefly. In this deal, just to bring it back to this topic, could the Ellisons reduce their equity in the company to zero? Could they farm it out to others? That was one of the concerns that Warners highlighted, is that there was the ability of the Ellisons to essentially syndicate or get out of the equity of this company and that and who knows who might have bought it i mean i don't even understand the question why would they do that when he's already got such a large equity stake in paramount and saying what they're arguing oh they could they could argue a meteor is going to hit the earth it's completely absurd and well they're trying to listen they've got deal guys that are poking holes in that offer but here's the deal matt listen to this you know you're talking about the ellison family and particularly a guy who is one of the greatest entrepreneurs in history.

23:15He has a track record of always delivering. So, you know, it's, it's, it's absurd to even, you know, disparage him with these kinds of assertions. Okay. Is it though? Like we know he has the money, but we don't know he has the commitment. That I think is what people are wondering. Hold on one second. Hold on one second. Six bids into it. You don't know he has the commitment. No, I know. And in all the text messages, he's involved, he's going to dinner with Zaslav. He's doing this stuff personally, but you know, So was Elon. And Elon tried to get out of his deal. And the Twitter board had to hold him to it because he made a personal guarantee.

23:50Right. Elon didn't spend the number of years and the commitment and the money building up Twitter the way the Ellisons had built up Skydance. And then apparently you got to remember something here. We didn't just show up. We're not deal jockeys just showing up. We've been at this for 15 years. And so it is completely a false narrative. And reputationally, this is very important that this get done the right way. And frankly, it's disrespectful to me. It's disrespectful to the Ellisons. Who do these people think they're talking about here? I spent 35 years doing everything the right way, and the Ellisons are no different.

24:21I mean, and he's one of the greatest entrepreneurs and business builders in history. When he says he's going to do something, he does it. And by the way, don't believe me. Look at his track record. He has never, he's done that trust, and he have been counterparties to tens of thousands of transactions, and he's never not delivered on any one of them, including the most relevant one, which was the paramount deal so all of a sudden just you know there's going to be this aberration that you know he flakes out it's impossible not happening false narrative and by the way matt step back for a minute if that is the crux of their argument they have no argument okay i think i think what we should be talking about is a delivery of shareholder value and certainty to these shareholders that's what's important that's where the fiduciary responsibility and the revlon duties reside and i don't know why we're not we should get back to that as opposed to all this other stuff.

25:07Well, why do you think they're doing this? Do you think this was all preordained? Zaslav and Ted Sarandos had a handshake deal. They were talking about him having a role. What is the reason that they, in your mind, are pushing this to Netflix? Look, I think you should ask them. I think... We have asked them. They say they have the better deal. Right. Well, that's categorically false. Start with math. Math doesn't lie. No, I get it. But what is the personal dynamic here? Why do you guys believe? Why did you send that letter from Quinn Emanuel saying that this was a farce of a transaction? Because it looked like this process was not, that there was not a level playing field.