Paramount / Warner Bros. Discovery: the $40 billion signature

0:00 It's December twenty twenty-five. Warner Bros. Discovery has just signed a deal to be acquired by Netflix. Netflix thinks it's won. Three days later, the bidder who's been told no three times goes over the board's head straight to the shareholders at an offer price of thirty dollars a share in cash.

0:21 The board's comeback isn't, "Your price is too low," it's, "Your value, your money isn't real." Two weeks after that, one of the richest men alive signs his name to a forty point four billion dollar personal guarantee. This is Tombstones. I'm Joshua Snyder. Today, the hundred and ten billion dollar knife fight for Harry Potter, Batman, and HBO.

0:50 Every other week, I take apart one deal, why it happened, how it came together, and whether it actually worked. Today, the biggest media deal in years and a bidding war that came down to a single signature. Part one, The Tombstone. The deal on one card. The buyer is Paramount Skydance, the company the Ellison family had put together only months earlier.

1:16 The target was Warner Bros. Discovery. That's the Warner Bros. Studios, HBO and HBO Max, CNN, TNT, TBS, and the rest of the Discovery cable networks. Signed February twenty-seventh, twenty twenty-six. Closed October sixth. About a hundred and eleven billion dollars of enterprise value, thirty-one dollars a share, all cash.

1:42 Enterprise value is the price of the whole business, not just the stock. They bought Warner, and they bought all of its outstanding debt as well. Thirty-one dollars was about two and a half times where Warner traded before anyone knew Paramount was interested. In deal speak, that's a premium of about a hundred and forty-seven percent to the unaffected price, i.e., where the stock sat before deal news started moving it. How do you pay for that? Fifty-four billion dollars of committed debt, plus about forty-seven billion of equity from the Ellison family and RedBird, with about twenty-four billion of that from Gulf sovereign wealth funds. And Larry Ellison personally guaranteed forty point four billion dollars of it.

2:30 The short version, Warner said no three times, ran an open auction, and handed the prize to Netflix. Paramount went hostile. Dad signed, and Netflix walked away with a two point eight billion dollar consolation check. Then came eight months of regulators, twelve state attorneys general, a restraining order, and a ticking fee of seven million dollars a day. This is a massively levered bet on content.

3:02 Can they play the Bob Iger game and monetize the library they've just acquired? I guess we'll find out over time.

3:10 Part two: the why. On paper, this deal makes almost no sense financially. Paramount bought a bigger company whose biggest profit engine is shrinking, the cable networks, and paid for it almost entirely with borrowed and borrowed against money. Why would a rational buyer do that? Maybe because it wasn't only buying for rational buyer reasons.

3:37 Let's start with the seller. Warner Bros. was the leftover of AT&T's twenty twenty-two spinoff of WarnerMedia. It was born carrying more than forty-three billion dollars of debt. By early twenty twenty-five, the stock was down more than sixty percent. In twenty twenty-five, it earned eight point seven billion dollars of adjusted EBITDA on thirty-seven point three billion dollars of revenue, both down with cable leading the way.

4:08 Management's own plan, announced in June twenty twenty-five, was to split in two: studios and streaming on the one side, cable networks on the other. A split like that is often a step one towards a sale. So when Paramount knocked, the board's job was simple. The most cash with the most certainty wins. The buyer's pitch, that is Skydance here, is scale.

4:37 Paramount Plus had about eighty-two million subscribers. HBO Max about a hundred and thirty-two million. Together, that's more than two hundred million monthly paying subscribers. Plenty of those are likely the same households, so it isn't necessarily two hundred million new customers.

4:53 There's probably a fair amount of overlap where families have multiple subscriptions. But it's still an absolutely enormous increase in the size of their paying audience. Add three studios, two news divisions, and a library of content with Harry Potter, DC, Game of Thrones, Star Trek, Transformers, you name it.

5:16 Then take out more than six billion dollars of overlapping costs, the quote unquote, "Synergies." So what kind of a buyer pays that? Strategic buyer versus financial buyer. A financial buyer, like private equity, buys for a return. Its bankers and lenders run the numbers, and that sets the ceiling, how much they can pay.

5:41 A strategic buyer is an operating company buying for what the deal does for their business it already owns, and because of that, they typically rationalize paying more.

5:53 Here's the twist. Netflix and Paramount were both strategics, but they bid like opposites. Netflix bid like a financial buyer. They came up with a number, a walkaway price, and actually had the discipline to walk away. The Ellisons and Skydance bid like the ultimate strategic with money from very financial places: banks, Apollo, RedBird, and sovereign wealth funds.

6:23 Three theories for why. Theory one, buy now or be the last one standing. If Netflix got Warner Bros., Paramount would have been the smallest legacy studio left with nothing left to buy. The same logic that had Facebook pay a billion dollars for a thirteen-person Instagram at the time. Theory two, the IP bet.

6:46 The Ellisons come from tech, not media. The bull case is that a tech-minded owner can earn far more from these franchises, whether that's converting them to video games or streaming and consumer products, than Warner ever did. Cutting six billion dollars of costs won't pay off this debt. Growing what each franchise earns might.

7:12 Theory three, it's a family building an empire. Larry Ellison's money paid for Paramount, then backstopped this deal. A media company with two newsrooms bought for reach as well as returns. That would explain a price a financial buyer would never pay. My read, one and two are the business case. Three is why the Ellisons could pay a price nobody else would.

7:39 Next, part three, how it came together. In this deal, there were six rounds of bids, and the challenger lost the first three. The setup. The Ellison family and RedBird had recently closed on National Amusements, Paramount's controlling shareholder, and merged that into Skydance and Paramount, forming the new Paramount company in a roughly eight billion dollar deal that closed in August of twenty twenty-five.

8:11 That gave David Ellison a public company, a stock to pay with, and a phone number that Warner had to answer. Round one, three low balls, and then ultimately the for sale sign. In September and October, Paramount makes three private offers, nineteen dollars, then twenty-two dollars, then twenty-three dollars and fifty cents a share.

8:35 Part cash, part stock, with a co-CEO title for David Zaslav as a sweetener. Warner says no, and no again. Then on October twenty-first, Warner does the thing a buyer dreads. It puts itself up for sale. It announces it would just seek a buyer.

8:55 Comcast bids for the studios and HBO Max. Starz bids for the cable networks. Paramount keeps bidding for the whole thing. Now it's twenty-five fifty in November, then twenty-six fifty, all cash, on December first. Now we're into round two. Netflix wins. December fifth, Warner signs with Netflix at twenty-seven seventy-five a share for just the studios and streaming.

9:21 The cable networks are going to get spun off to shareholders. For about seventy-two hours, the fight was over. Netflix had won. But then round three, Paramount decides to go hostile. December eighth, Paramount skips the boardroom and goes straight to the owners with a thirty-dollar all-cash tender offer for all of Warner. A hostile tender offer goes directly to the shareholders over the board's objection. Hostile doesn't mean nasty. It means uninvited. Paramount's argument, splitting off cable leaves shareholders worse off than selling the whole company to a single buyer.

10:01 And the board's rebuttal is the best line of the whole saga. It doesn't say your price is too low. It says, "Your value, your money isn't real. We don't know if we can count on it." The Ellison backing sits in a revocable family trust. Translation: A trust you can revoke is a promise you can break.

10:23 Round four, dad signs. December twenty-second, Larry Ellison gives the largest early Christmas present of all time, an irrevocable personal guarantee of forty point four billion dollars of equity plus any damages. Paramount also raises its regulatory breakup fee to five point eight billion dollars to match Netflix.

10:50 The board's best argument is gone with one signature. From here on, it's only about price. An equity backstop is a promise to cover the equity if the other investors don't show up at closing.

11:01 Usually, it's a fund's commitment letter. This one was personal, and it was irrevocable. Round five, the seven-day window. February twenty twenty-six, Netflix grants a seven-day waiver so Warner can talk to Paramount again. Paramount comes back with thirty-one dollars a share and a seven billion dollar reverse termination fee.

11:25 And Paramount offers to pay Netflix's two point eight billion dollar breakup fee itself. On February twenty-sixth, Warner's board declares it a superior proposal. Netflix has the right to match, and Netflix calls the deal a, quote-unquote, "nice to have" and declines. On February twenty-seventh, Paramount signs. The money, a strategic bid built with financial capital in three pieces.

11:56 First was the debt, fifty-four billion dollars committed by Bank of America, Citigroup, and Apollo before closing. It was refinanced with about fifty-two billion of new bonds and loans at rates from about six point three to nine and an eighth percent. Warner Bros.' existing bondholders swapped into about twelve billion dollars of new second-lien Skydance notes.

12:21 Second lien means they get paid after the first lien lenders if things go wrong. Riskier, so generally it's gonna pay more. Equity, about forty-seven billion dollars, fully backstopped by the Ellison family and RedBird. About twenty-four billion of it came from Saudi Arabia's PIF, the Qatar Investment Authority, and Abu Dhabi's L'imad sovereign wealth funds.

12:48 Those funds took no board seats and have no governance rights. As passive investors, they were able to stay out of the CFIUS review. CFIUS is the federal panel that screens foreign investments for national security risk. The FCC still had to approve foreign ownership above the limits for broadcast licenses.

13:12 The sweetener, Paramount's existing shareholders got about four hundred and seventy-one million warrants for free. Each one is a right to buy a share at twelve dollars. That was in part to offset the dilution of the new equity coming in. Round six, the regulators. June twenty twenty-six, the Justice Department clears the deal without conditions.

13:37 July, Europe signs off once Paramount exits UIP, its film distribution joint venture with Universal. Then the plot twist. Twelve state attorneys general and the Writers Guild sue, and a judge issues a temporary restraining order. A TRO freezes things in place until a judge can hear the case. It doesn't decide who wins.

14:03 And a clock is set. Starting October first, Paramount owes Warner's shareholders seven million dollars for every day the deal isn't closed. That's the ticking fee. The states settle on September twenty-first. No divestitures and no money. Instead, promises thirty to thirty-two films a year, a share of them made in the US, and an independent editorial board over CNN and CBS News.

14:31 The court approved it September thirtieth. The deal closes October sixth, just six days and about forty-two million dollars of ticking fees later. The one term that won it is absolutely the irrevocable personal guarantee. Every bid before December twenty-second lost on certainty, not price. That is, the Warner Bros. board wasn't certain the value was really there and the deal would really close.

15:00 That guarantee turned trust us into a contractual obligation. After that, Paramount only had to win on price, and it had the deepest pockets in the fight. Remember the alternative. Netflix takes the studios and streaming, and Warner's shareholders are left holding the cable networks as a separate company.

15:20 Deal people call that leftover the stub, and it probably wouldn't have traded all that well. Paramount's pitch was simple: Take thirty-one dollars for everything and skip the stub. Part four: The verdict. In one line, Warner's shareholders hit the jackpot. Netflix got paid to lose, and Skydance bought itself a very expensive maybe.

15:46 Let's start with the price. A hundred and eleven billion dollars is about twelve point seven times Warner's twenty twenty-five EBITDA. That's EV to EBITDA, the price tag in one number. Twelve point seven years of today's earnings. Fair for a growing business, pretty expensive for a shrinking one. And Warner is shrinking where it matters.

16:09 Per Fitch, the cable networks were fifty-two percent of revenue, but eighty-six percent of EBITDA in twenty twenty-five. The cash that pays the debt comes from the part that's declining. Leverage. Fitch has the combined company at seven point eight times debt to EBITDA in twenty twenty-six. The company's target is about three times by the end of twenty twenty-nine.

16:35 Seven point eight times means that it takes almost eight years of every dollar of operating cash flow to pay off that debt. Fitch cut the rating to BB at closing.

16:46 That's high yield, the polite word for junk, with bonds priced as high as nine and an eighth percent. And rates moved the wrong way during the fight. The ten-year treasury went from about four point three percent to five point three. The synergy promise, more than six billion dollars a year within three years against about eighteen billion of EBITDA.

17:09 That's a full third. Cost synergies are the believable kind. Revenue synergies are the kind that live and exist only in bankers' slide decks. The bull case, there's only one. Let's call it Hogwarts. Hamilton Helmer calls this a cornered resource, something valuable that competitors can't get at any price. That library of content, Harry Potter, DC, HBO, Star Trek, they don't lose value because a rival builds more.

17:40 A two hundred million subscriber service is the first legacy streamer that can stand up next to Netflix. And an owner willing to guarantee forty billion dollars personally can ride out a bad year that would break a normal LBO. The bear case, it's a growth price for a shrinking business. LBO-level leverage at the worst point in the rate cycle.

18:03 And synergies that fight the settlement. Those film count promises limit where the six billion in savings can come from and cuts that deep risk losing the people who make the hits. Will the content actually be any good? Plus, you have two co-CEOs, two cultures, two newsrooms that will be watched with absolutely every decision.

18:29 What has to go right? They have to deliver the savings without losing the talent, merge the streamers without a spike in cancellation, find a way to get leverage down to around three times by twenty twenty-nine, probably with asset sales or find a way to earn more from every franchise.

18:48 Or the third option, put in even more equity. My grades, Warner shareholders absolute A-plus. Knocked it out of the park. They turned a nineteen dollar part stock lowball offer into thirty-one dollars in cash and got the deal closed. Netflix, A-minus. It drove a rival's price up, never overpaid, and cashed a two point eight billion dollar check for its troubles.

19:17 That's price discipline. Skydance, incomplete, I'm leaning towards a C. It won the fight brilliantly. Now it has to win the peace. We'll have to revisit this one in twenty twenty-eight and see if they were able to hit the synergy goal, de-leverage the company without asking dad for more equity money, and ultimately drive the business to be bigger and more profitable than it has ever been.

19:45 Part five: The Lucite. The deal toy goes to the MVP, and this one isn't even close. It goes to dad, Larry Ellison, for the forty-point-four billion dollar irrevocable personal guarantee. Think about what Warner's board was really saying in December. We don't doubt your price. We doubt the money is really there.

20:05 One single signature fixed that. Plenty of us have asked a parent to co-sign something. Nobody has quite asked like this. Honorable mention goes to Warner's board, bankers, and management team for turning a nineteen dollar lowball offer into thirty-one dollars in cash with a signed Netflix deal as the stalking horse.

20:25 They performed admirably in getting the absolute best value they could for their shareholders and in some part to themselves. Part six, the takeaway. In a contested deal, certainty beats price right up until both sides are fully funded, then price decides it. Paramount had the higher number for two weeks and kept losing because Warner's board couldn't bank on a revocable trust.

20:57 If you're a buyer, your financing is part of your bid. Get the commitment on paper before the seller has to ask. If you're a seller, a credible second bidder is worth more than any banker's book. If you know someone who works on deals, send them this episode. Next time, a deal that looked just as crazy at the time, Disney paying four billion dollars for a comic book company that didn't even own Spider-Man.

21:24 I'm Joshua Snyder. This has been Tombstones.