Ellison\u2019s lawsuit and proxy battle faces difficult odds of success, experts say, but could complicate and drag out the approval process for Netflix\u2019s $83 billion deal<\/b>
\nEven after eight rejections, Paramount CEO David Ellison remains undeterred in his mission to buy Warner Bros. Discovery. That obstinacy will lead to a lot of pain for all parties involved as the executive is taking his war with Netflix and WBD\u2019s board to court.
Ellison filed a lawsuit in the Delaware Court of Chancery on Monday in an effort to extract more information about the Netflix deal\u2019s terms and math behind its value, and is threatening to replace Warner\u2019s board outright through a proxy battle. The plan? The Paramount Skydance CEO will try to sway shareholders to install a new slate of directors and make changes to the company\u2019s corporate bylaws, arguing the current board is not acting in the company\u2019s best interest by going with Netflix.
But similar to Paramount\u2019s tender offer, which only garnered 400,000 shares as of Dec. 19 ahead of a Jan. 21 deadline, the nuclear option of a drawn-out legal challenge and proxy battle is a difficult one, experts told TheWrap.
\u201cIt\u2019s a very hard case to prove the board has been shirking or falling short in their fiduciary duties to get the best possible value for the Warner Brothers Discovery shareholders. Dollars is their primary objective in this exercise,\u201d Corey Martin, managing partner of Granderson Des Rochers LLP\u2019s entertainment finance practice, said. \u201cWithout Paramount increasing their offer, there\u2019s no incentive for the shareholders to vote for the Paramount slate. It all boils down to money and if they want this company, they\u2019re gonna have to blow the Netflix bid out of the water.\u201d
The move is just the latest wrinkle in the increasingly complicated saga of the Warner Bros. M&A race. While Paramount is hoping to find a weakness in the Netflix offer, experts say the lawsuit has a low chance of success and would only add further complications and delays to what is expected to be a protracted approval process. Shareholders are largely looking for a higher bid, which Paramount doesn\u2019t seem willing to make as they\u2019ve reiterated their \u201csuperior\u201d $30-per-share offer in their flurry of press releases over the last few weeks.
Emarketer senior analyst Ross Benes told TheWrap that Ellison\u2019s lawsuit comes off as \u201ca desperate attempt by a company that didn\u2019t get its way,\u201d but warned that Paramount will \u201cuse all avenues available to press WBD into submitting to their will.\u201d
\u201cIt\u2019s unlikely the lawsuit alone will reverse the deal to be in Paramount\u2019s favor,\u201d Benes added. \u201cBut it is part of a broader strategy to keep pressing until something gives and then seizing on that opportunity.\u201d
Ellison\u2019s decision to take to the courtroom to get a deal done runs in the family. His father, Oracle co-founder and the second-wealthiest man on the planet Larry Ellison, didn\u2019t hesitate to sue PeopleSoft back in 2003 in the midst of his hostile bid for the enterprise software maker, which had already struck a deal to merge with J.D. Edwards. Ellison was victorious after a lengthy legal battle, which included a lawsuit by the Justice Department, and ultimately acquired PeopleSoft.
On paper, the situations look similar. But Paramount is in a far weaker financial position than Netflix, which even after volatility in its stock price is still worth more than $400 billion vs. Paramount\u2019s $13 billion.
\u201cNetflix has superior cash flow and a superior balance sheet,\u201d Stephen Henriques, a senior research fellow at Yale School of Management\u2019s Chief Executive Leadership Institute, told TheWrap. \u201cParamount will be stuck with a debt burden that\u2019s going to take years, if not a decade, to pay off.\u201d
While acknowledging the difficult odds, Braden Perry, a regulatory and government investigations attorney, told TheWrap that the litigation could create leverage for Paramount by stripping away some board protections, such as confidentiality and deference, or even trigger additional negotiations. Martin said the lawsuit may be simply aimed at getting the additional information it needs to submit a high enough bid to beat Netflix, or it could just be adding another roadblock in the approval process of the $83 billion deal.
\u201cIt\u2019s a high bar, but they don\u2019t need an outright win. They just need to slow the process and extract information and leverage to cause a reevaluation,\u201d Perry explained. \u201cBut generally, courts are hesitant to interfere with arms-length deals, unless there are clear fiduciary breaches. Most likely, this will delay and potentially revise the transaction, and perhaps, through discovery, identify some leverage.\u201d
Meanwhile, a vote to replace the board would typically be held at Warner\u2019s 2026 annual meeting, which has not set a date, though a threshold of just 20% of shareholders who have held the stock for at least a year are needed in order to call a special meeting before then.
CELI CEO Jeffrey Sonnenfeld argued that Ellison\u2019s odds of winning a proxy battle are \u201cunlikely\u201d and that their efforts are \u201cnot going to make a difference\u201d without raising its bid above $30 per share. Despite its regulatory hurdles, Sonnenfeld and Henriques told TheWrap the Netflix deal as it stands is ultimately a better long-term opportunity for shareholders than Paramount.
\u201cThere\u2019s no evidence that [shareholders] have confidence that the Paramount deal would be a smooth transaction as Ellison is arguing it would be. Basically, [the Ellisons are] overplaying their hand as Trump allies,\u201d Sonnenfeld told TheWrap. \u201cThis debt load is problematic, it\u2019s already classified as junk. So this is going to be pretty hard.\u201d
Warner Bros. Discovery blasted Paramount\u2019s move on Monday, arguing it is \u201cseeking to distract with a meritless lawsuit and attacks on a board that has delivered an unprecedented amount of shareholder value.\u201d
\u201cDespite six weeks and just as many press releases from Paramount Skydance, it has yet to raise the price or address the numerous and obvious deficiencies of its offer,\u201d a spokesperson told TheWrap. \u201cIn spite of its multiple opportunities, Paramount Skydance continues to propose a transaction that our board unanimously concluded is not superior to the merger agreement with Netflix.\u201d
Even with an irrevocable personal guarantee from Larry Ellison, WBD has pointed to the fact that abandoning its deal with Netflix in favor of Paramount could result in $4.7 billion, or $1.79 per share, in total costs. It also warned that Paramount\u2019s $55 billion in debt financing heightens the risk that the deal could fail to close and cited other operating and debt refinancing restrictions that could damage WBD\u2019s business.
Ultimately, without the board\u2019s approval, Ellison\u2019s last hope is in the hands of the shareholders, which offer a mixed bag of sentiment.
GAMCO Investors chairman Mario Gabelli told TheWrap on Monday that he still intends to tender the majority of his clients\u2019 more than 5 million shares to Paramount and called on Netflix to simplify the structure of its bid. He also said Paramount should hold off on raising its bid until it sees how its litigation with WBD plays out.
Warner\u2019s fifth largest shareholder Harris Associates believes that Paramount\u2019s revised $108.4 billion bid is \u201cnot sufficient\u201d and has called for the media company to raise the offer, while the media giant\u2019s seventh largest shareholder Pentwater Capital Management has accused the Warner Bros. board of failing to appropriately engage with Paramount and breaching its fiduciary duty.
\u201cWe have the ability to vote for who represents us on the board of directors. We have the ability to vote for if we want the Netflix transaction or not,\u201d Pentwater\u2019s CEO Matt Halbower told CNBC last week. \u201cWe are a small voice, but I think it\u2019s important for the board to at least hear our voice as the seventh largest shareholder, because I think what they\u2019re doing is wrong. If Paramount goes away, then it is a lost opportunity.\u201d
Warner Bros. Discovery shareholders are expected to vote on the Netflix deal in late spring or early summer. Netflix, which is engaging with regulators including the DOJ and European Commission, has said its deal would close in 12 to 18 months, while Paramount has argued that its bid would close within a year.
The Department of Justice asked for additional information in its review of Paramount\u2019s tender offer and lawmakers on Capitol Hill have already gotten the ball rolling with a hearing evaluating the impact of a potential WBD merger on consumers and competition. A favorable ruling by the Justice Department could benefit Paramount\u2019s regulatory approval argument.
Paul Nary, a Wharton School of Management assistant professor who specializes in M&A strategy, told TheWrap how the situation will play out is \u201canyone\u2019s guess\u201d and pegged the odds in the Paramount-Netflix case at a 50-50 toss up.
\u201cParamount is clearly still serious about staying in the game and pushing whatever advantage they can,\u201d Nary said. \u201cMost of the time, if the winner is the challenger and not the incumbent bidder, they typically have to come up with a higher price or something to make their bid more appealing. It\u2019s rare to win without coming up and offering better terms.\u201d<\/p>\n