Paramount CEO David Ellison’s acquisition of WBD fails to clear final hurdle

David Ellison is the son of film production company founder and billionaire Larry Ellison. paramount skydance For a little over a year. he has fought to get warner bros discovery For almost as long.

The latest obstacle in his way is a group of state attorneys general seeking to block the deal. This may be the hardest thing he’s ever done. Antitrust hurdles and related delays have left CEOs looking for ways to get the deal done.

Paramount’s delay in completing its acquisition of WBD could add significant costs on top of the proposed $110 billion price tag at a time when media companies around the world are under intense pressure.

But Mr. Ellison, with an antitrust trial scheduled for March, has never been more confident that the deal not only makes sense but will go through, according to people familiar with his thinking.

“We strongly believe this,” Jeffrey Kessler, Paramount’s chief trial attorney, told CNBC in July, adding that he was prepared to take the matter to the Supreme Court if necessary.

Still, Ellison appears to have little interaction with California Attorney General Rob Bonta, who is leading the states’ cases in court. Both sides said they were eager to make amends outside of court.

“I think the whole question is whether the state AG is interested in settling. Given the fact that local constituencies here in California are overwhelmingly opposed to this deal, I’m not really sure there’s any real incentive for the state AG to settle,” said Tom Rogers, a media veteran who is currently a senior advisor at Versant Media Group and chairman of AI film and television production company Fountain 0.

A Paramount spokesperson declined to comment for this article.

Mr. Ellison’s pursuit of WBD began last September with three unsolicited bids to acquire the storied entertainment company, which included its legendary film studio, portfolio of pay-TV networks, and HBO Max streaming business.

Mr. Ellison’s interest ultimately led to a formal sale proceeding in lieu of WBD’s plan to split the property into two. When Warner Bros. Discovery was crowned Netflix Ellison, the winner of the bidding war, turned hostile and promised WBD shareholders a premium.

In February, Netflix abandoned its pending deal and Paramount entered into a deal to acquire WBD in its entirety. The transaction has received approval from all global regulatory authorities, including the U.S. Department of Justice’s Antitrust Division.

This leaves Mr. Bonta and the 11 other states in the lawsuit as the final threat to Mr. Ellison’s long-sought acquisition.

Bonta said part of his goal is to pick up the baton in areas where he feels President Donald Trump’s administration lacks regulation. He said Trump had also been “inappropriately involved” in other merger matters.

Meanwhile, the relationship between the Ellison family and President Trump has drawn criticism. Larry Ellison is a longtime supporter of Trump and has publicly stated that the president wants CNN, owned by Warner Bros. Discovery, to go to Paramount.

When speculation began in the spring that a group of states might seek to challenge the merger, Mr. Ellison’s Paramount quickly began lobbying Mr. Bonta’s office, with the focus on two areas of the merger in particular: a pay-TV network and a broad portfolio of powerful movie studios, according to people familiar with the matter. By mid-May, the company had sent Bonta a list of potential concessions, the person added.

After a California district court granted a preliminary injunction halting any activity related to the merger for 14 days, Paramount formally postponed the merger and said it was prepared to move the merger litigation to trial.

But the March trial date was later than company executives expected, according to two people familiar with the matter.

In the weeks that followed, Paramount went on the offensive.

Immediately after the lawsuit was filed in mid-July, Mr. Ellison published an op-ed for the New York Times publicizing his case against the deal. The article follows industry leaders’ arguments for and against the merger, expanding the discussion beyond legal filings.

Mr. Ellison is also trying to win over the Hollywood box office with a deal that would guarantee the Paramount-WBD combination would release at least 30 films a year with a 45-day theatrical window for at least three years, according to people familiar with the deal, who asked not to be identified because they were not authorized to speak publicly.

Then, reports surfaced that Paramount was considering moving its studio and headquarters out of California in response to Bonta’s challenge. A person with knowledge of the situation told CNBC that a move to Tennessee is being considered.

The proposal largely backfired, with Bonta calling the threat of relocation “blackmail.”

California Law said in an interview on CNBC last Thursday that it was willing to discuss the matter outside of court, but that any settlement would require “robust structural remedies.”

A meeting was held in Bonta’s office the next day, according to a statement from a government official’s spokesperson. Another meeting was scheduled for Monday, but that meeting and media coverage of what could ultimately be included in the settlement, including the sale of some pay-TV networks, prompted Bonta to call off the talks, his office said.

A Bonta spokesperson on Monday claimed that Paramount was behind the “leak” of the parties’ discussions, and further said the content had been misrepresented and showed a “lack of good faith.”

“My office would be happy to reunite with Paramount if they would quit the game and make an honest effort,” Bonta said.

Paramount responded late Monday, denying that it was the cause of the leak.

“We remain hopeful and ready to continue negotiations in good faith toward a resolution of the Attorney General’s lawsuit and move forward with plans to increase competition and increase production to the benefit of talent and entertainment workers,” the company said in a statement.

The contents of Paramount’s list of concessions sent to Mr. Bonta’s office in May remain unclear, but appear to contrast with what Mr. Bonta and his colleagues have raised red flags about.

“(Paramount) wanted to talk about everything but what this lawsuit is about. They want to talk about the streaming market, which we don’t allege in the complaint. They want to talk about foreign regulators. We want to talk about the three markets where we believe there are antitrust violations mentioned in the complaint,” Bonta said in an interview with CNBC’s David Faber last week.

Paramount has declined to say what remedies are being offered, other than addressing the film industry.

In a July interview with CNBC, Mr. Kessler, the Paramount lawyer, said Paramount was prepared to submit a written commitment to produce 30 films a year, justifying Mr. Ellison’s earlier promise, which some thought was unrealistic given Hollywood’s track record.

Kessler said he would file a lawsuit himself if Paramount failed to deliver on its promise. That promise formed the basis of Paramount’s offers to sign deals with Hollywood exhibitors, at least one of which accepted the offer, the people said.

The Wall Street Journal recently reported that the state government is seeking to sell some of the pay-TV networks included in the merger. The Paramount-WBD merger would create the industry’s largest network portfolio, but states argue that size creates extraordinary power regardless of the business context.

“Whether the market is shrinking or growing is completely irrelevant,” Bonta told CNBC last week, adding that the Paramount-WBD merger would create “probably illegal market concentrations” in film and television.

But ongoing industry challenges, particularly for these two companies, are the basis for Ellison’s push for a merger. And that may be a better argument than Bonta admits.

Industry analysts, experts and insiders have consistently poked holes in the state’s argument that the TV network merger raises antitrust issues.

“While the merger would certainly create a larger competitor, size alone is not a sign of market position; neither company has the scale needed to compete effectively with much larger global streaming platforms and deep-pocketed technology companies,” Bernstein analysts said in a recent note.

The latest earnings reports from media companies including WBD and Paramount once again highlight continued losses from pay-TV advertising and distribution revenue streams.

Paramount’s chosen remedy is to expand.

Both companies’ portfolios consist of dozens of television networks, with Paramount’s offering including channels such as Nickelodeon, MTV and BET, while WBD owns channels such as TNT, CNN, TBS and the Discovery Channel. Paramount also owns the broadcast network CBS.

Bernstein analysts said, “The economics of pay TV are driven by consumer behavior, not consolidation. While mergers may change the size of participants, they do not change the direction of the industry’s long-term trajectory.”

It’s a similar story for streaming and movies, with Paramount similarly merging the two companies’ portfolios.

Ellison said that once the merger is complete, Paramount+ and HBO Max will become one service. The combined organization will include two major movie studios. But neither company dominates in either category.

“The states also claim that the combined company will control about 27% of U.S. theatrical releases and about 30% of U.S. blockbuster film distribution. While these numbers are certainly meaningful, they fall far short of establishing a dominant market position. More importantly, theatrical market share is dependent on the annual content schedule,” Bernstein analysts wrote.

Company executives believe the rate of decline in pay TV is starting to stabilize.

Andy Gordon, Paramount’s chief strategy officer and chief operating officer, said in a recent interview that “the rate of subscriber decline is starting to slow down. So we’re not quite there yet, but we’re steadily increasing our subscriber base, probably in the mid-30 million range domestically.”

Still, a recent report from S&P Global Ratings notes that while cord-cutting rates are improving in the U.S., there aren’t many improvements these companies can take advantage of in the coming years, meaning media companies won’t have as much leverage in distribution discussions with pay-TV operators.

And generally, despite the loss of subscribers, these channels are still profitable and are often used to fund other parts of their media businesses, such as building streaming services or paying down large debts.

Since Warner Bros. and Discovery merged in 2022, the company has been aggressively repaying debt primarily resulting from the merger.

If Paramount’s acquisition of WBD is completed, the combined company will have nearly $80 billion in debt.

Delaying it beyond September 30th would only increase expenses as Paramount would be responsible for paying “ticking fees” from WBD shareholders. Paramount asked the court to force the states filing the lawsuit to post $1.88 billion in bail to cover fees and costs associated with the delay.

— CNBC’s Sarah Witten contributed to this report.