Who gets to buy Warner Bros Discovery?

0:05Pushkin. Nothing gets Wall Street and Wall Street journalists pumped up like a good old-fashioned money fight. And we have a doozy going on right now. The target is Warner Brothers Discovery. The contenders are Netflix and Paramount. Today on the show, the future of entertainment and the dynamics of dealmaking. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong coming to you from a frigidly cold New York City. And I am joined by the Butch Cassidy and Sundance kid of deal journalism. James, or possibly the Statler and Waldorf. James. Darskin Hutch.

0:58Which one of those is a Warner asset? That's the only thing that matters. Yeah. James Fontanella Khan is the U.S. financial editor of the Financial Times. And the Sundance kid is our U.S. deal editor, Oliver Barnes. Deal correspondent. Deal? Oh, God, I forgot. I was trying to promote you there. Can I be deals editor? It's up for grabs. Maybe off to this. Okay. This is one of these shows where there's so much to talk about that the hard thing is what we're going to leave out. But this all culminated on Monday with this hostile bid. But let's go back to the beginning. Where did the whole saga of who gets to buy Warner Discovery begin?

1:41Yeah. Where does the lineage of this all start? I mean, it's a kind of it's a plot fit for Hollywood, isn't it? David Zaslav, who's this kind of larger than life figure in Hollywood. Warner CEO. He's the Warner Discovery CEO. He creates Warner Discovery by kind of merging his less sexy cable company Discovery into this storied movie studio Warner Brothers a few years ago. And that company underperforms. underperforms. And then Zaslav hatches a plan to break up that company and spin off the cable assets, the CNNs of the world, the Discovery, Animal Planet. I don't know if you watch any of those.

2:21These are wasting assets. Exactly. To break those apart from the studio asset, which is behind Harry Potter and the DC Comics franchise and the streaming service, HBO Max. I'm a subscriber and I like it. So am I. Yeah, yeah, yeah. Very good and also pretty affordable. And just, I'm going to make you pause there. I just want to set some financial context for our listeners. So over the last six months, Warner Brothers Discovery is up 190%. Would you care to guess what it is up over five years? Three percent. Right? So it's interesting. That's value creation. Until there was a dogfight over this asset, it was a struggling stock, which is kind of interesting.

3:08And that was the genus of the breakup. And the breakup took on different forms. And I think initially he was going to spin the studio and streaming assets off, and then it reversed. The good stuff was going to go. And then it was getting rid of the less sexy assets. But then, simultaneous to this. This is sort of this summer that the breakup is happening. Yeah, the breakup was officially announced over summer. Yeah. Simultaneous to this, you have another kind of theme and story unfolding in Hollywood, which is that the Ellison family, Larry Ellison, the founder of Oracle, one of the world's richest men.

3:43I think he was the world's richest man. Maybe it's changed in the last few years. Yeah, it's changed. It's always changing. Veselations of the stock market. And his son, David Ellison, are going and building a new Hollywood powerhouse. They've merged together Skydance, the company that they created, did they? Well, it was David's company, a production company behind Mission Impossible and a bunch of other. They merged that with Paramount, again, one of the storied Hollywood movie studios. But Paramount's small. And they're the Ellisons. And they've got big ambitions. So they're looking at what's going on with Warner.

4:17And they're like, this is a neat fit. Yeah. For our mouse eating this elephant. For us growing into a bigger size movie studio. Mouse that roared, if you will. Yeah. And they kick all this off with a bid out of the blue delivered by David Ellison to David Zaslav's home in Hollywood. Yes. Which was owned by the former Paramount boss. I mean, it's a script. I know. Fit for Netflix writing room. What kind of car did he drive over there? It's like a classic convertible of some kind. Yeah, like some old Chevy or something. I don't know. I doubt it. Okay. So at this point, so a bid is in at this point.

4:56And where are we in time? At that time, it was about 19 bucks, something like that. Yeah. So the bid gets upped a bunch of times. But the first bid, I think, came in at, yeah, it was under 20 bucks. And that's this, in the autumn, at some point, this is happening, right? Yeah, this happens in September. Okay, great. So there's a bid in. And also immediately hits the public domain. This whole process has unfolded in the public domain. And that's why it's not entirely surprising that they've gone hostile. Like, this is all being litigated in the media. And it's a big media bidding war. And we're grateful.

5:29And we're going to take a moment to thank all the players. Thank you. For being so noisy about this. And how's that initial bid received? And what's the next step? JFK. It wasn't received very well. I mean, Zaz, as he's referred to, said, not interested. We're going to keep on with our plan to split the company. But then the pressure kept on growing. And at some point, as Ali was referring to, they kind of changed the split and they decided to spin off the cable, the kind of the less performing assets, CNN and whatnot, and to keep under the Warner Discovery umbrella, the kind of streaming and studio business.

6:12And the reason they did that was to attract precisely the interest of the Netflixes, the Amazons, the Apples of the world. Yes. And they did come. Yeah. And at that point, we're around October. Yeah. When does Netflix appear on the scene here? Around that time. I mean, essentially, Warner announces a kind of we're kind of looking at alternative options. Yes. Strategic alternatives is a classic term, which means we're putting ourselves up for sale. Yes. And at that point, Netflix hires bankers. Comcast hires bankers. And then there's a lot of noise, as Ollie referred earlier. But what emerges quite early on is that there's three bidders.

6:59The first one is Paramount. The second one is Comcast. Let's pause on Comcast for a second. Tell us what Comcast is. Comcast is the most traditional, if you want, rival to Warner Brothers in terms of it has a studio. It has traditional TV. It has cable. So that's kind of... And they had also, in their own right, split their streaming and studio business from the traditional TV assets. And importantly, they've got a kind of not particularly well-performing streaming service, which is Peacock. Do you subscribe to that? I do not. Well, there you go. I do. Oh, you do. You like Yellowstone. That's why.

7:37Premier League, no. They have Premier League. Yeah. Okay. So, and the third bidder? And the third bidder, which was the most surprising one in many ways, was Netflix. Why would that be a surprise? It seems like a natural. So, first of all, Netflix has never done real big M &A. In fact, I can't recall of any major M &A at all. I think their biggest ever deal was a$900 million deal. They're like the kind of build, not buy philosophy. I mean, you were in LA, Ollie. What were people thinking about Netflix participating in this? Well, the interesting thing was, I think everyone discounted that Netflix would win this for a long period of time.

8:12But when you spoke to people who kind of had like run the numbers, the Netflix deal kind of made most sense. It gave them what they wanted, right? And they have tremendously valuable equity, right? They have a currency here. They can give shares. But let's not move too far away from the timeline here. We'll get back to that equity. We'll get back to equity before very long. Could I just add one more thing about Netflix? Even internally, their CEO, Ted Sarandos, had said around the beginning of the auction that they were looking at it, but they weren't that interested. Also, the other fact that was slightly a bit of a distraction maybe, Maybe or was it Reed Hastings, the founder of Netflix, didn't seem particularly enthusiastic about a deal.

8:58And so what's next in the timeline? Now we have three bidders on stage. Netflix comes in with an offer that is very compelling. But how does it play out? Well, on Thursday night, it kind of emerges that like Netflix is. Last Thursday night. Yes, last Thursday. Essentially, they're the winner. They're in exclusive talks. And there's a rush to get the deal closed. And that's where some of the kind of tension with Paramount kind of emerges because they feel, why are we rushing this thing? And they ghosted them for the whole of Thursday, right? Absolutely. Who ghosted who? So on Thursday, before a key board meeting at Warner, to the point that Ollie was making earlier, the Paramount camp starts feeling this is something weird.

9:45They're not really giving us any feedback on the latest bid, which was at$30 per share. And the last time they had heard from Warner, they were told, point number one, cash is king. So we want an offer which is primarily in cash, ideally entirely in cash. Second, we want certainty of closure. And then they had raised some issues around the funding of Paramount's deal. what they referred to in that case was that some of the money backing Paramount's bid came from the Middle East. And so there was a concern over the approval of that deal from a national security perspective. So the way Paramount addresses those concerns are threefold.

10:34They increased the cash bid. It's entirely cash. Second, on antitrust, they said that they have backing, that their offer is safer than Netflix's, which is seen as the main rival at this point. And obviously, their close ties to the Trump administration are indication that they're well positioned. Yes. And thirdly, on the cash, coming from the Middle East, from Saudi Arabia, the Emirates, and Abu Dhabi. And in addition to that, there's the backing from Jared Kushner, who was a known until then. And he's basically using his fund, Affinity Partners, to back the bid. And Paramount says none of these people or none of these entities from the Middle East plus Jared Kushner would have any governance rights or board seats.

11:28What that means - So are they just saying, Zaslav, you'll still run the whole thing? No. What they tell Zaslav is that he will become co-CEO of the new Paramount Warner Brothers kind of entity. So along David Ellison, that was kind of... Along with David Ellison. That's very interesting. And that's when Netflix seals the deal. So despite all this. Yeah. Despite all the kind of head fakes along the way where they'd said, you know, we don't really do big deals. Yes. And I think a lot of people were skeptical for the antitrust questions over Netflix that they could ever get this done. They did it.

12:07I think it's the biggest media deal in... Well, it's the biggest deal of the year. And this is what forces Paramount to go hostile. Exactly. They made this improved bid. Exactly. It's all in cash. They've talked about security of ownership. They've said, we will give up our governance rights to you. And they just blew them off. Yeah. And went with Netflix anyway. Yeah. And so it's like they had to go hostile. They weren't picking up the phone. Exactly. And the hostile bid, just to close the loop that we got this week on Monday, Did that improve the term still further, that bid from Paramount? It's an exact replica of the bid that they submitted on December 4th.

12:49It's the only difference is they're taking it directly to the shareholders. Exactly. Right. With that hostile bid came a very detailed regulatory filing from Paramount, right? Which is, in a sense, one of the advantages of them going to shareholders, which is they get their story out there. We see every blow-by-blow account from their perspective. Including text messages and stuff. Including text messages. And what you see in that is a degree of kind of desperation emerging from the Paramount camp in the few days before Netflix wins this. And you can understand why perhaps they feel a bit slighted by Warner.

13:26This is where we pivot to politics, right? Because they might have reasoned under the Trump administration, antitrust enforcement with big deals is dead. No one is going to stop the already dominant Netflix from buying more muscle in the streaming market and more brands of content because Trump is pro Wall Street and pro deals, which is what makes it so clever of the Paramount camp to get the president's son-in-law involved on their side of the bid. I mean, it feels like it's a brilliant. I mean, we may have thoughts about whether this is all totally ethical or it smells slightly of corruption or whatever, but it feels like a pretty smart move to me.

14:10To be clear, though, Jared Kushner is not the only person who can put a call into Trump. We have a ton of people in this situation who are putting calls into Trump. I mean, Trump said over the weekend that he recently had dinner with Ted or did he have dinner with Ted Sarandos? He met with Ted Sarandos. And he met with the Ellisons. Ellisons, he's a backer of Trump. Larry is. The father has given money to Trump. So clearly there's a whole bunch of people who think they can put a call into the White House. But none of them are related to the guy. None of those other ones are married to Trump's daughter.

14:46Fair. It definitely doesn't hurt. Yeah, yeah. But all it has to do is put a seed of doubt in the Warner Discovery Board's mind, right? But it hasn't done that. It hasn't. That's the point. It hasn't actually, like in pressing that Trump button, and we've discussed this on the podcast before of like, you know, activating the political side of deals. Theirs hasn't succeeded so far, at least, in convincing the Warner board of the merits of this. What is interesting, though, is like Trump is making this process as political as he can get it. He said quite clearly that he's going to get involved, which usually you don't have a president getting involved in antitrust approvals.

15:27On the flip side, though, to Ollie's point, he's been weirdly level-headed because he said, yeah, Netflix has a big market share. I think that's kind of hard to deny. And he said - The president said this. The president said that. He's getting technical. But he also said, we probably need an economist to kind of look into this. He also said, neither of these guys are my friends, right? He said that the following day. because in the moment when he said that like oh there could be a problem he also said that ted sarandon is a great guy he's like changed hollywood for the better kind of thing yeah so it's like it's that's the thing with trump you never know right and and not that trump's gonna get like down into the details here but he has a point on a technical level and can i just say this which is talking to a bunch about antitrust people over the past few days which is netflix yeah you can see the antitrust argument against it they are the most well-known streamer the biggest streamer in terms of number of subscribers digesting the third biggest streamer hbo max which also undercuts netflix in terms of price right okay so you can understand the antitrust argument against them but there's also an antitrust argument against the paramount camp there's also horizontal integration happening there paramount a massive movie studio in hollywood is buying another large movie studio in hollywood and that the netflix camp argue will probably lead to a whole lot more job cuts right it's not like super cut and dry where it's like netflix probably has the more antitrust concerns but it's not i agree just purely on netflix the way i see it is this deal would have never happened with the previous administration of course either of them and that's kind of an important factor that brings to your earlier point, like people feel that under Trump, the impossible suddenly becomes possible.

17:18We've talked a lot here, given listeners a lot to chew on. I just want to end and go to the break by asking you, who's going to get Warner Discovery? Prediction time. I think Paramount. Why has Paramount gone to shareholders? number one they want to put their narrative out there number two they force netflix to put out which will be coming in the next few days a very detailed disclosure about what this looks like for what wbd shareholders because they're going to own netflix shares so that there'll be there'll be information about netflix in there there'll be information about warner and their negotiations with netflix so there's a whole load of information coming out right but why have they really done this, I think this is as an entree to encourage, or you could say kind of coax Warner to re-engage with them.

18:14In the dying days of that process, Warner went cool on Paramount for whatever reason, maybe it's the personal dynamics, maybe it's they legitimately thought it was a worst deal, whatever, whatever. But they have now gone public to create an environment where Warner now re-engage in them. Very rarely do you see tender offers go through as tender offers, right? I would put a large amount of money that is not going to happen. But I think what does happen is Warner at some point re-engages with Paramount. And if you look at the disclosures, the filings of Paramount and some of the text messages that go back and forth, and indeed what David Ellison said on CNBC, this is not best and final.

18:57And that implies they have more cash. And we know the Ellisons have more cash. Infinite cash. You know what I mean? Maybe not infinite, but like a lot. Well, infinite too. JFK, do you agree with all that? I tend to agree with Ollie's kind of reading. We will have to see Paramount increasing its bid. And then on the flip side, Netflix never really wanted this asset in the first place. They've already lost about$100 billion in market value, so they could have bought. So their shareholders are telling them, we don't love this bid. Stick to what you know best. Grow organically. Listeners, we'll be right back with Long and Short.

19:48Welcome back. This is Long and Short, that portion of the show where we go long things we like and short things we don't like. Oliver what do you got for us? I'm going long cinema Really? And I'll tell you why I was having a discussion with a friend the other day who's a filmmaker and he was saying when you look back in the history books of Hollywood when the movie studios have not always delivered the great art and when there's been moments of consolidation and stuff like that and the movie studios have been all powerful actually the indies have had a great moment in the sun so actually I think weirdly whatever we end up with here whether it's Paramount the winner or Netflix the winner We're going to get better movies.

20:25We're going to get artistic, beautiful movies made by independent filmmakers. Right on. Hell yeah. JFK, what do you say? I'm shorting Christmas. Oh. Ho, ho, ho. What? I had no idea. We had a Grinch or a Scrooge in the studio. Why? I'm going to the seaside and enjoying life. Yeah. On the beach. And you're not going to be sitting in front of the crack of fire. Pay presents. All that, yeah. Okay. Listeners, whether you are spending Christmas by the seaside or in front of a Christmas tree, we hope you will listen in on Thursday when we will be back in your streams. Until then, stay sharp out there.

21:06Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. Topher Forges is the FT's acting co-head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.