The Ellison Empire Strikes Back: Paramount Goes Hostile

0:00This episode is brought to you by FX's Love Story, John F. Kennedy Jr. and Carolyn Bissett. The critically acclaimed series explores the undeniable chemistry, whirlwind courtship, and high-profile marriage of one of the most iconic couples of the 20th century. With Sarah Pidgeon and Paul Anthony Kelly leading a cast including Naomi Watts, Constance Zimmer, Alessandro Nivola, and Grace Gummer. Called 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. This episode is brought to you by Netflix, presenting Beef, from creator, writer, and director Lee Sung-jin.

0:41The new installment of the eight-time Emmy-winning anthology series features powerhouse performances from Oscar Isaac, Carey Mulligan, Charles Melton, Kaylee Spaney, and legendary Korean actors Yoon Ye-jung and Song Kang-ho. Esquire raves its hands down the best TV show of the year, and IGN hails it a masterpiece. Lee Sung Jin's series remains an untouchable force. Beef for your Emmy Awards consideration. It is Monday, December 8th. It's a war. As I predicted on this show, David Ellison and his Paramount studio have gone hostile for Warner Brothers Discovery. This morning, the Ellison sent a letter to our guy David Zasloff and his board at Warner Discovery, arguing that its all-cash$30 a share offer for the owner of HBO Max and the Warner Brothers studio is a better deal for the company and more likely to pass regulatory hurdles.

1:32So they're going directly to the shareholders now. This is days after Warner settled on a deal with Netflix for nearly$28 a share in cash and stock. $30 is obviously bigger than$28, especially in cash. But remember, Ellison would be buying all of Warner Discovery, including the low-value cable network CNN, TBS, TNT. and Netflix has agreed to buy just the studio and streamer. So the difference in the bids here kind of comes down to how you value those cable networks that are about to be spun off into a separate company. Are they worth a dollar a share, like Ellison says, or three, four, even five dollars a share as Netflix hopes?

2:08The higher the value assigned to them, the more likely Netflix made a comparable bid because it leaves behind all these valuable assets to prop up the overall value of the company. The lower the value of those assets, the more likely the Ellison's bid is bigger with those assets included. Got that? It's a little confusing. Ellison went on CNBC this morning to plead his case, and Netflix co-CEO Ted Sarandos happened to be speaking at the UBS conference in New York. So we got a real back and forth in real time today. We're really here to finish what we started, Ellison said, and later Sarandos countered by saying the Ellison move was, quote, entirely expected.

2:44We have a deal done, and we're really happy with the deal for shareholders, for consumers. it's a great way to create and protect jobs in the entertainment industry. That reference to jobs was not an accident because Paramount's execs have boasted that they expect$6 billion in synergies from the combined company. That's a lot of jobs lost. And of course, Donald Trump has now entered the process and Jared Kushner too. Kushner, of course, the son-in-law of Donald Trump. So lots of questions and lots of anxieties. I wanted to have someone to go through it all with me. Peter Supino is here. He's an analyst at Wolf Research, has been following the sale process closely, he's been on the show before.

3:22Today it's Netflix versus Paramount for Warner Brothers. Let the hostilities begin. From The Ringer and Puck, I'm Matt Bellany and this is The Town.

3:35Okay, we are here with Peter Supino, who is the managing director and senior analyst at Wolf Research and a returning champion on The Town. Welcome back. Thank you. I'm delighted to be called a returning champion. You are. And honestly, you were here in October and we were talking about who might bid for Warner Discovery. And you said on this very show that you thought that Amazon and Netflix were for real as bidders. So one for two, not bad. Be a good batting average in baseball, at least. You were much more bullish on Netflix than I was. I didn't think they were serious. Well, we didn't have any special insight other than focusing on the numbers.

4:14And economically, Netflix was always the bidder that brought the most scale to this transaction if they wanted to do it. So that's all we said, was that they were the best buyer economically. And my take was that I didn't think, I mean, nothing in their past suggested they would have any interest in doing this. But we were proved differently. We were proved wrong, or I was at least. The other thing about Netflix is that they've proven the generality that then the facts change, smart people change. And they've been willing to change at every step in the way. They've been very entrepreneurial. And as their business has evolved and the competitive environment has been involved, they've been willing to do things they previously said they wouldn't do.

4:50Yeah, true. Although their stock is down double digits since they have been interested in this company. So it's yet to be seen whether this is a net positive for them. But I want to talk about that because now we have an official hostile bid for the company. We kind of knew this was going to happen, but the Ellisons are not going away. Comcast is going away. It's just the Ellisons versus Netflix. And I think a lot of people in town, in Hollywood, are kind of confused as to why these two bids are different, why Ellison feels like he was screwed over here. So I just want you, just right off the bat, to walk us through the two bids and how they are different.

5:32So start with the Netflix bid, which we know about. So based on the company's testimonials on December 1st, Paramount sent Warner Brothers an offer. And Netflix and Warner Brothers seem to have made an agreement on December 4th, which was announced on December 5th. The reason I'm sharing that timeline with you is because Paramount's second offer was made on December 4th. So if you agree with our guess that Netflix and Warner had agreed verbally on their deal on December 4th for announcing it to all of us on the 5th, then it might explain how we got into this situation. because maybe Paramount's best offer, their$30 offer with the financing guarantees that the Warner board wanted and didn't feel like they'd gotten in the December 1st offer, maybe that second offer came right as or after the board made an agreement with Netflix, which they announced the next day.

6:42Yeah, although there's some back and forth in the statement they filed with the SEC about how David Zasloff was like not responding to David Ellison's text. He said, by the way, offer is not best and final. By the way, would love to work with you. What's going on here? It's sort of jilted lover style text. And what we now know is that they had been talking to Netflix and agreed to do the deal there. Let's not get into the machinations here and whether Zaslav and the board like screwed over the Ellisons. Just give us what the bids are. All right, so Netflix bid$27.75 comprised of 23 and a quarter of cash and 450 of Netflix stock.

7:25That deal does not include the purchase of the global networks division of Warner Discovery. You can call it Shitco. We call it Shitco or Crapco. Do I get to use that term on this podcast? You can use that on this podcast. Okay, so no Shitco, 27.75 for the good stuff. A reasonable range of estimates for Shitco's value is$1 to$3 per share. And so Warner Brothers shareholders can imagine that they're getting total value from the Netflix proposal of$27.75 of proceeds from Netflix, cash and stock, plus whatever the residual value of Shitco is after factoring in all the debt. Right. Because they're taking on a lot of the debt.

8:07Yes. So Shitco generates lots of cash. It's going to pay lots of interest. It's going to have lots of debt. And$1 to$3 per WBD share is a reasonable guesstimate of what it'll trade for. But that's key because that is a guesstimate. And some analysts, including Jessica Reif-Ehrlich at B of A, have said that that could be as high as$5 a share, the value of that company. And if so, my colleague Bill Cohan was writing about this yesterday. That would change the calculus here pretty significantly. It would. for a decade, it has paid to take the under on all forecasts of earnings and multiple as it relates to anything in the cable network arena that wasn't called ESPN.

8:51I mean, that's sort of why we got into this problem in the first place, is that all of the estimates that David Zaslav and the Discovery people put on the linear cable business when they took over Warner Discovery, all of those have been short. And that's where they are today in this situation because they were not able to generate enough cash to pay the debt and everything imploded. Brief sidebar, Fox also deserves recognition, the current Fox portfolio for being one of the cable network portfolio that has actually met, in some cases, beaten expectations. But that's a digression. Go ahead. But they're a state-sponsored media propaganda arm that has benefited from ways that go beyond the fundamentals of the cable television business.

9:32They have one cable channel that is incredibly powerful. And then they have a broadcast network that has football. And that's basically it. The things you just said in sports. Yes. Yes. Okay. So, all right. So that's the Netflix offer. Explain the Paramount offer and why they believe it's superior. So Paramount has offered$30 of cash for the whole enchilada, including Shitco. So just to revisit, you can compare that$30 offer to this$27.75 from Netflix, including whatever you think Shidko's worth. And the Paramount offer is very, very interesting because it matches the enormous breakup fee of over$5 billion that Netflix provided.

10:19And it also includes financial guarantees by the Ellison family and Redbird Capital to close the deal. And the deal does not include a financing contingency. And so this offer from Paramount achieves appears to address the major concerns of the Warner Discovery Board. Right. So the Ellisons are saying that not only is it a better offer, it specifically addresses the issues that they had when they were negotiating. And Warner's didn't give them a chance to present this offer before they took the Netflix offer. That's your intel, which I have no disagreement with. Well, no, that's in the SEC filing.

11:03If you look at the timeline presented in that SEC document, they believed that they were still negotiating. And then all of a sudden, Warners went quiet and then announced Netflix. Yeah, the Netflix-Warner agreement seems to have gained enough steam that Warner stopped talking with Paramount. I agree with you. That's known now. Yeah. Well, the other side of it, the Warner side says that the Ellison deal was not what they promised, that there was no written document saying that Larry Ellison was backing this. They were just like saying it without proving it. Then there's all this issue of the foreign money, because while the Netflix offer was cash, you know, they took out some loans and then they had the stock.

11:50the Paramount money is coming from the Ellisons, Redbird Capital, and then all of these other funds in the Middle East, which shouldn't be a huge issue, but it did raise questions as to whether they would be above a threshold to require an inquiry about whether they would have control over the company. And it just sort of, there's a nick factor to that, right? Yes, the Paramount team would argue, and I think reasonably, that they will face a lower or less regulatory scrutiny than Netflix. But we're not convinced that the Paramount path is as easy as that narrative suggests because Paramount's synergy forecast is$6 billion.

12:36And while half of that$6 billion probably comes over on the cable network side, which is not as sensitive in Hollywood, the reality is most of that$6 billion is going to be headcount. And the Netflix synergies are$3 billion. And of$3 billion, a billion is just recapturing payments that Netflix makes to Warner Brothers for HBO content. And other studio content. Yeah. And so actually, Netflix Synergy, they're$2 billion. And of that$2 billion, we know reportedly, or at least we are told, that a lot of the savings are in technology. Netflix spends$3.5 billion on a run rate annually on technology. So there's a lot of leverage in that combination through tech.

13:22And so ultimately, we think the Warner board believes that the combination between Netflix and Warner will result in a much better path for morale and for human capital at Warner and HBO. And that may be relevant to the political and regulatory review. It's certainly relevant in Hollywood. And I want to make clear here, what you're saying, and the documents back this up, is everyone in town is like, which of these is better for me? That is the question that everyone in town is asking. Is there any debate? Yes, there is. People are very afraid of Netflix. They see Netflix as the interloper. They don't like them.

14:01They've come to town. They've taken over. They don't put movies in theaters. They should be afraid of Paramount's pro forma leverage, and they should be afraid of that 6 billion number. Well, that's what I'm saying. 6 billion in synergies. Most of that comes from people getting fired. Plain and simple. We said this last week. Two studios mashing together. Everybody is duplicative. So the best business affairs exec, the best gaffer, the best craft services person, all of those people are going to be put together and the person who's not the best is out. That is 100 % going to happen. Whereas the Netflix offer is things that they don't necessarily do.

14:42They don't do licensing. They don't do theaters. They don't do a lot of the HBO style content. So the perception at least is that those things, and Ted said it today, whether we believe him or not, yet to be determined, but he did say that we're not going to disrupt those businesses. This is why we're buying the company. We want to have these ancillary businesses that Netflix doesn't currently have. Now, I don't know if I believe him on theatrical distribution, but I kind of do believe him on HBO. And I kind of do believe him on producing shows for other platforms, which is the specialty of Warner Brothers television.

15:19And with Paramount, that is a non-starter. It's all mashed together to serve their combined service. On HBO, I completely agree with you. An analogy I've been alluding to is the way Disney has managed FX. Despite the general dissolving of the Fox studio within Disney, FX has been left with a lot of autonomy because it's perceived to be a very special, creative engine that requires a boutique structure to continue to be what it has been. Same as Searchlight. Yeah. And so it seems like that's what HBO can be within Netflix. And HBO is even bigger than FX because HBO has been a standalone streaming service, whereas FX, they didn't start a streaming service based on FX.

16:04They put it into Hulu. And I think HBO is way more valuable than FX as a brand. But that's the pro-Netflix argument. Give me the pro-Paramount argument here. Other than David Ellison stomping up and down saying, we got screwed. What is the argument here for why this is better for shareholders to take that deal? The shareholder-driven pro-Paramon argument is simple. More money with less regulatory risk. Yeah. But is that true? Let's get into this on the regulatory thing because I don't think we know. The impression that they left was that our path through Donald Trump is easier than anyone else's path.

16:47Then boom, Netflix reports that Ted Sarandos was meeting with Trump in the Oval Office. Trump goes on television and says that Ted's a great guy. Netflix is a great business. Yes, they're going to have to look at it because of the market share. But it's certainly not anti-Netflix, which some might have thought, given that Ted is a very prominent Democrat and was one of the big donors to Kamala Harris. And his wife was Obama's ambassador to the Bahamas. Then you'd think that Trump would be in bed with the Ellisons. But then 60 Minutes airs an unflattering story that has Marjorie Taylor Greene in it.

17:20And Trump is going on saying that the new owners of CBS are just as bad as the old owners. So, like, what are we supposed to make of that? It seems possible to me that Trump wants to appear politically as if he's skeptical of all of the interest in this company and that he's going to look out for the common man's interest. No, no, no, no, no, no. No, maybe that's what he thinks he's projecting. That's what he wants us to see. Right. But what he's actually projecting is, where's my piece? Where's my cut? What are you going to do for me? And that is exactly the problem here, is that these guys have spent so long kowtowing to this president that now he expects to insert himself into any possible deal, certainly one of this size and importance, and he wants some concession for himself.

18:11So what are they going to do? What can they do on both sides here? Already, the Ellisons have brought in Jared Kushner, who's Trump's son-in-law, and someone asked Trump about that. He's like, oh, I don't know about that. We haven't discussed it. But certainly that's going to be a factor if Jared says, listen, do this for the Ellisons. It's going to help me and my business in the Middle East. Doesn't it screen credulity that Kushner would have made this commitment without a point of view on the viability of Paramount's role? I mean, clearly he thinks this is going to get done, and I think he has a more useful view than any of us.

18:44Well, but even two weeks ago, we all thought Paramount was getting it. And certainly when David Ellison was on his cash tour of the Middle East, getting donors or getting backers involved, he was confident in telling them, you know, get on board. We're doing this. This is a Trump friendly media. Why wouldn't interest in the Middle East be interested in joining that? Okay, I'm going to propose a different angle in this regulatory discussion, which is stepping back from the Trump factor, which of course is really hard to handicap. Let's think about market definitions. Paramount's strength as a company is television.

19:21CBS has a big audience. It's almost as big factoring in linear TV as Netflix is in streaming. And so the merger review that would be tougher for CBS isn't streaming, it's linear TV. But Paramount Plus is really small in streaming. it's 2 % of total engagement. And so if the regulator is concerned about a market definition of streaming, then the Paramount merger is a lot easier to get through. If the regulator is concerned about a market definition, which is television, a much bigger market because it encompasses streaming, but an even larger linear TV market, then it's still easy for Paramount to get through because their total exposure would be less than 10 % of the total TV market.

20:06So there is no market definition. The definition that Netflix wants is that it's all consuming. It's everything that anybody is watching anywhere. And they would compare YouTube. They would compare Disney as a distributor. So if you combine Disney plus Hulu with ABC ESPN, Disney is actually bigger than Netflix. That argument by Netflix is fine from a consumer engagement, sort of customer acquisition perspective. but it misses the perspective of the town. From a purchasing perspective, the market really is linear TV. The market is long form video. Maybe the market is streaming video, but it's not short form.

20:47They're different businesses. It's not social, yes. And I would argue that the market for streaming video is different than the linear television market because one is going up, one is going down and they are different businesses when you look at them holistically. I would argue that. I don't know that a regulator would. The regulator's job is to evaluate the public good through a lot of different lenses. And if they do decide that the way video is made and distributed needs to remain competitive, then they should look at this market definition more narrowly.

21:26This episode is brought to you by Accenture. When your advertising operations fall out of sync, campaigns slow down, insights get buried, and opportunities get missed. That's why Spotify and Accenture are working together to reinvent the rhythm of ad sales. Using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. To learn more, check out Accenture.com slash Spotify. Adobe Firefly is the all-in-one creative studio with AI-powered image and video editing for today's creative process.

22:07Built 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. Okay, so do the Ellisons need to go higher in their bid? I mean, we are taping this on Monday afternoon. Maybe they will have gone higher by the time this posts. But$30 a share, to me, is an increase, but doesn't seem like that much more of an increase for the board and the shareholders to re-engage on this.

22:52Am I missing something there, or do they need to go higher? This afternoon in the Post, David Zasloff invited Paramount to offer$35, which would, the Post's opinion was that that would cover the breakup fee payable to Netflix in case Warner would decide to dump Netflix and some incremental premium for the Warner shareholders. first. Stepping back, I think that there is a price at which Warner should feel well enough paid for the regulatory and financial risks that they see that they would just have to go with Paramount. And part of that is going to relate to what Netflix does next. I mean, Netflix stock was down almost$5 today because the market's concerned that they might try to compete at a higher level.

23:45Yeah. And at some point, if the stock keeps going down, it gets rid of the justification for doing this in the first place. Isn't there a collar on this? Explain the collar. The collar relates to the 15 % of Netflix offer about$4 per share in stock. And at lower Netflix stock prices, Netflix owes Warner more shares. Right. And it starts to become an issue for Netflix. It does and it doesn't. I mean, you're talking about variance on 15 % of the offer price, variance on$15 billion, and Netflix market cap is$500 billion. So they can handle the volatility, but it does factor in. And the Zaslav factor here.

24:36Ellison pretty clearly believes Zaslav wanted this to go to Netflix from the beginning and essentially shoehorned a deal there. How much does that even matter? Like, so what? If the offers are comparable and you have these flashing red lights on Paramount with the overseas money and with the Larry Ellison factor, like, so what if Zaslav wants Netflix to have it? So Warner Brothers is a non-controlled company. It's a common stockholder-driven company. And David Zasloff is a loyal servant of the board of directors who are there to oversee shareholder interests. Although we also learned that John Malone was in some of these conversations.

25:21He seems to be a loyal servant of John Malone who controls the board. My point is that at a wide enough spread, David Zasloff will sell this company to the highest bidder. The board's view seems to have been that the offer by Paramount was close enough to the shareholder outcome that would come from Netflix plus the residual value of global networks that in such a close call, you could value the Netflix synergy forecast. you could do the deal with Netflix on the basis of the much gentler synergy strategy. At a much higher price, it will be harder to convince shareholders that that should be their driving motive.

26:08And just to be clear, the synergy strategy, the preference of the Warner Brothers board for Netflix synergy approach is not just meant to benefit Hollywood. it's also meant to support the continuing vitality of Warner and HBO as businesses during the pendency of the merger. Because one really valid concern of the Warner boards is that none of these deals might pass regulatory review. And if Warner's board chooses Paramount, or Comcast for that matter, and if the Paramount deal ends up failing regulatory review, and the human capital at the studios have been anticipating being fired for two years, that's a worse outcome for the ongoing value of this business than if they're in Netflix hands expecting to have a bright future.

26:59Yep. And we know this because Warners has been through a couple of these mergers before and nothing on this scale where you're literally putting together two studios. But they've had new owners coming in promising synergies before. And it does lead to chaos and brain drain. It's a problem. So why, if the whole valuation of the spinoff companies is such an issue here, why doesn't Ellison just revise his bid to go after studios and streaming only and compete with Netflix mano a mano? No. Because Ellison doesn't have a stock like Netflix does that trades for 35 to 40 times earnings. And as a result, he just doesn't have the currency to compete purely on price for the same asset as Netflix.

27:48You think that's true? Even with the second richest man in the world as his backer? He has the money, but he doesn't have the financial accretion. I mean, that money of his father's has a cost of capital. And it's lower than a stock that trades for 40 times earnings. Okay. All right. So this has been very wonky. And I want people in Hollywood to have a takeaway here where they can go to lunch and dinner parties this holiday season. And when people say, who's going to get this company, they can have an answer. So what is your answer? Paramount should win this because Paramount is the easier regulatory review in the United States and in Europe.