Paramount Sues WBD Because Takeover Battle Gets Ugly

In a major escalation of the battle over Hollywood’s most iconic assets, Paramount Skydance today filed a lawsuit against Warner Bros. Discovery (WBD) in the Delaware Chancery Court. The legal maneuver comes alongside a hostile takeover bid as Paramount tries to derail WBD’s existing merger deal with Netflix.

Paramount is suing WBD

The conflict stems from WBD’s decision to reject Paramount Skydance’s $108.4 billion cash offer in favor of $82.7 billion in cash and stock with Netflix. Paramount CEO David Ellison claims WBD’s board is “misleading” its shareholders by favoring an inferior offer.

“This morning, we filed a motion in Delaware Chancery Court to ask the court to simply order WBD to provide this information so that WBD shareholders have what they need to make an informed decision about whether to tender their shares in our offer,” Ellison said in the letter.

Objectives of the lawsuit

The lawsuit, filed in Delaware Chancery Court, seeks to compel WBD to provide transparency regarding:

• Valuation Discrepancies: How WBD Valued ‘Global Networks’ Equity and Total Netflix Deal.
• Risk Adjustments: Basis for WBD’s “risk adjustment” in Paramount’s $30 per share cash offer.
• Debt Mechanics: Details on how the debt reduction works in the Netflix deal.

“WBD did not include any information on how it values ​​Global Networks’ scrap equity, how it values ​​the overall Netflix transaction, how the debt purchase price reduction works in the Netflix transaction, or even the basis for its ‘risk adjustment’ of our $30 per share cash offer,” David Ellison said in a letter Monday.

Paramount launches proxy battle for WBD

Behind the courtroom, Paramount Skydance is launching a proxy battle to take control of the WBD board. It intends to appoint its own slate of directors to the WBD board at the next annual meeting. These directors would be tasked with reviewing Paramount’s offers as part of their fiduciary duties. In addition, Paramount is proposing an amendment that would require shareholder approval for any WBD “Global Networks” divestiture (a key part of the Netflix deal).

The main difference between the two offerings lies in scope and structure. Netflix’s offer is a “friendly,” board-approved deal valued at about $72 billion (about $27.75 per share) and a mix of cash and stock. The bottom line is that Netflix doesn’t want the whole company; it’s a selection of “crown jewels”, namely the Warner Bros. film studios. and HBO/Max, while letting the “global networks” (like CNN, TNT and Discovery) be spun off or sold separately.

In contrast, the Paramount Skydance offer is a “hostile” all-cash offer valued at $108.4 billion ($30 per share). Paramount is bidding for 100% of WBD, including its debt and problems with linear cable networks.

The WBD board rejected Paramount’s offer

Despite Paramount’s ( PSKY ) offer appearing more lucrative on paper ($30/share vs. $27.75/share), the WBD board categorized Paramount’s offer as “inadequate” and “risky.” WBD said in its release: “PSKY’s offer is not superior or comparable to the Netflix merger.”

In its letter to shareholders, WBD said: “PSKY has repeatedly failed to present the best proposal for WBD shareholders despite clear guidance from WBD regarding the shortcomings and potential solutions.”

The report stated: “WBD’s board, management team and our advisors have engaged extensively with PSKY’s representatives and provided it with explicit instructions on how to improve each of its bids. Yet PSKY has continued to submit bids that still contain many of the deficiencies we have previously repeatedly identified to PSKY, none of which are contained in the Netflix merger agreement, all while claiming that its bids do not represent its ‘best’ and final proposal.”

WBD expressed concern about the debt

The board’s main concern is debt. Paramount’s offer would require more than $50 billion in new borrowings, creating $87 billion in total debt for the combined entity. WBD Chairman Samuel Di Piazza Jr. warned that this “extraordinary amount of debt” created a significant risk that the deal could fail to close, leaving WBD in a weakened state.

In his release, he also pointed out the massive size difference between Paramount and Netflix. “PSKY is a US$14 billion market capitalization company that is seeking an acquisition requiring US$94.65 billion in debt and equity financing, which is nearly seven times its total market capitalization,” WBD said in a statement.

talk to CNBCPiazza said: “We have a merger agreement signed with Netflix, it’s a compelling value, a clear path to closing and protection for our shareholders if something stops closing, whatever it is.”

WBD will have to pay Netflix’s termination costs

The Board of Directors assessed the significant financial penalties associated with accepting PSKY’s offer. Moving away from Netflix’s existing contract would trigger a $2.8 billion termination fee and a $1.5 billion debt swap penalty, along with $350 million in incremental interest. These costs amount to $4.7 billion ($1.79 per share). Ultimately, these obligations would reduce the effective regulatory fee to terminate PSKY from $5.8 billion to just $1.1 billion. In contrast, the Netflix transaction carries none of these financial burdens.

Why Paramount Wants to Buy Warner Bros. Discovery?

The desire for quick survival drives Paramount’s interest in acquiring Warner Bros. Discovery through scope. In a landscape dominated by tech giants like Netflix, Amazon and Disney, Paramount CEO David Ellison sees the merger as the only way to transform Paramount from a “vulnerable legacy player” to a “global media titan.”

Streaming is a big game these days, where only the biggest survive. By combining Paramount+ with Max (HBO), the new entity would control the fourth largest streaming library in the world with more than 207 million subscribers. This would give the combined company the leverage needed to negotiate better prices with advertisers and reduce the churn that plagues smaller services.

Additionally, the deal will create the most powerful sports broadcasting platform in history, making the combined company an important partner for every cable and satellite provider worldwide.

Why is Netflix interested in WBD?

By owning this content, Netflix eliminates billions in future licensing costs and the risk of titles being pulled by rivals. The sheer volume of new content reduces “hit-rate risk” and strengthens the value proposition for its subscribers worldwide. As Netflix Co-CEO Ted Sarandos noted, the mission to “entertain the world” is better achieved by combining their “culture-defining titles” with Warner Bros.’ a century-old heritage.

The merger brings together the world’s largest subscription streaming service with HBO Max, a premium and critically acclaimed competitor. Analysts predict the combined entity will control more than 21% of US streaming viewership, creating a significant market gap between Netflix and its remaining competitors such as Disney+ and Amazon.

Netflix expects to achieve at least $2-3 billion in annual cost savings by the third year. This will come from the elimination of duplicate services (such as the merger of HBO Max with the Netflix platform), the integration of the production infrastructure and the optimization of back-office functions. This massive savings provides a financial cushion to reinvest in original content or pass savings on to consumers through bundled deals.