Warner Brothers Discovery

Welcome to shareholder Primacy from freefloat media, a podcast about activists investing, security slaw and all the ways the financial and legal worlds intersect and Collide in mostly real life. We're back and lifting is a law professor at the University of Colorado and she teaches and research to Securities and business law, she holds up the legal end of this podcast and that's Michael Levin and activist investor who lives and works in Chicago. He covers the financial side of the podcast. Yes, I try. So Anne, how you been, you stay in warm. They're much snow in Colorado Springs. We'll share some of ours. It was it didn't. It didn't get above zero in Chicago last weekend so so you could have had if you want. Anyway, yeah, right. Just one step, be nice. So let's let's talk about something today. Let's talk about Warner Brothers discovery which is a Interesting complicated pending so we don't have anything Final on it. A deal, it's gotten its share of, you know, news. In the whole, you know, business news environment for some of the players and so forth which we'll talk about a little bit. But there's also some really interesting economics and financial issues going on because there's a bidding war. Of sorts between Netflix and flx and Paramount skydance piece guy. So we call Warner Brothers Discovery wbd too if you're looking at symbols anyway. So we thought we would look for a little while at some of the legal and financial kind of aspects but also some of the controversies. There's some really interesting stuff going on both financial and legally about this kind of deal that we could probably start to take apart. So let's do that today, shall we? Go, absolutely. And I'll just drop the Necessary, reminder, that we have an email address. If you want to get in touch with us for a child or Primacy at freeflow LLC, but swinging into this. So one thing I just have to say at the outset, is that what makes this fight hilarious for corporate. Lawyers is it's a replay of something that happened in 1989. So, in 1989 time signed a merger agreement to acquire Warner and Paramount swooped in after that. Merger agreement was signed because they wanted to break up the deal though. In that case it it creates it wanted to bid for time not Warner and there was a big litigation in Delaware over it and Paramount lost in a famous case that every business law student reads and time and Warner merge and of course that company Time. Warner combined in recombined always been all over the place and now it's Warner again. Warner signed a merger agreement with Netflix and what hope once again, Paramount's trying to break it up, trying to poop in the punch bowl there. Oh, Okay, so let's let's kind of tell a little bit of the story. about the deal without touching on any of the real legal stuff and then we'll talk about Um, some of the activism somewhat later because there's some activists, you know, peace guy is a little bit of an activist here, I suppose. Yeah. But we can we can look at it through the activist lens somewhat after we've covered some of the financial legal issues. So let's let's let's cover that Warner Brothers, of course, kind of needed to sell itself. Warner Brothers Discovery is, you know, this famous Largely profitable movie studio, famous Warner. It's like iconic and there's a famous right DC, right? But, I mean, they got franchise to all sorts of stuff, man. It's going to the best library's around and if famous but someone less profitable collection of cable TV channels the old Discovery right. This CNN And so forth. The main one of those is HBO, you know, very prestigious sort of cable channel and that's as well. Talk about a little with, that's kind of going with Warner Studio, not with the cable properties, but we'll discuss that in a minute. Originally Warner Brothers, discovery. Planted just spin off the cable properties. The cable properties are not growing. They don't make a whole lot of money. It's really hard for them to compete with like YouTube. Comcast just did that with its cable, everyone no one wants cable TV. I mean, 30 years ago cable TV was where it was at, that's in part what the whole Time Warner deal was about, but no longer. So, originally, they were just gonna kind of spin off these cable properties, and that would be just to be clear shareholders, would get would then, at the end of, that's been off, it would mean that if you're a shareholder of Warner, you would be holding shares of the Old Warner, right? The studio with the Studio streaming and Studios. And then you would also be holding shares of this new company that had the cable stuff and then you could do what you like with, right? Exactly. And, and the expectation would have been that the cable Studio's would have, you know, potentially attracted a buyer at some point. So, you wouldn't necessarily be stuck with this independent cable, Studio cable company, but who knew anyway, so Then a while before this all became kind of extremely public Paramount started looking to buy the whole thing. And Paramount's Paramount is Paramount, skydiving. So shortly after Viacom. National amusements. Kind of sold that media property to Larry Ellison's. Son and who's vehicle is called skydance. So they started making bids for it. And Warner Brothers. Discovery said we probably need to do a formal process. And so they you know hired bankers and lawyers and so forth and started saying okay who's interested in our company and what form? And so they went there, you know, usual process, I've done it. You know, I've been on boards that have had a supervised. This kind of thing you solicit bids. From all these major players, they ended up with a few serious ones, the main bitters toward the end. Were piece guy, Paramount skydance Netflix and also Comcast. Was conceivably going to acquire. He wasn't clear what their bid was like. It was, it was, you know, they were most interested in Warner's, they can combined with universal. Just like Paramount wants to combine the Paramount Studio with Warner and anyway, so Comcast it wasn't clear what Comcast would have done with the cable properties, because they were spinning out their cable properties. But anyway, Comcast no longer there. The Warner Brothers board looked at the last bids from piece guy and Netflix and pick Netflix. They said okay we're we like Netflix has been. That's the one we're going to endorse. That's the one that we're going to take a vote on, blah, blah, blah. All right, let's talk about the two bits. Netflix proposed a deal that combined a ton of cash so they were going to have to go borrow a bunch of money. They're going to go issue a whole bunch of debt. but it was going to be cash and also some bit of Netflix stock that amounted to 20 a mounted and still today amounts to 27 dollars and seventy five cents per Warner Brothers share So the valuation was somewhere in the, I can't remember the exact number in the 70 billion range for the Enterprise Value. And, you know, if you look at what Warner Brothers Discovery doing, they were in the 20 to kind of 25 range for the month or two before that. So, that was a decent though not, you know, healthy premium over what it was trading at. So, Warner Brothers, Discovery Cheryl's would have would have done just fine but but that deal didn't was only for Warner Brothers Studio and HBO. So not correct, right? So the Warner Brothers discovery. Shareholders, which kind of keep the cable properties. Is that little side company. We were talking about a minute. So this plan keeps intact. The plan is spinning off the cable companies. Yes. And then Netflix just buys streaming and Studios. Right? And then and you know, there were a couple interesting Parts this because there were Netflix shares involved They, you know, those can vary in price and they've gone down some Netflix shareholders, were a little skeptical of this, or, you know, just the ability for this kind of newfangled relatively speaking and Hollywood streaming. Studio whatever, we all know, Netflix to kind of acquire and deal with and kind of make money off of Warner Bros and HBO. So the chair price is kind of drifted and there was a collar in the deal so that if Netflix have to clean too much. Yeah, right there. Because we were going to use that but then, but then, okay. Anyway. So so Netflix announced. Okay, we like Warner for reasons. We're about, I think we're about to just cut the board said, fine and can. And in the middle of all that, as I said, Paramount kind of came in and pooped in the punch bowl and said, okay, we're gonna come in with a different offer. We're coming with a higher offer. So instead of 2700 basically 28, a share rounding up, they were offering thirty dollars a share a little more money, and they were offering all cash. now, where Paramount was going to get the 90 billion dollars, Paramount skydance is not big, right? I mean, like so this is a tender offer. Well, I call it a fake tender offer, but we'll talk about it with this fake tender offer, 30 dollars per share, But it includes the cables. So you've got Netflix 2775 per share, right? Plus the cable assets, right? For Warner shareholders, right? Or you a Paramount of thirty dollars per share for the, that includes the cable properties. Exactly. So the only change since then, Was Netflix changed. Its offer took the Netflix shares out of it. And now Netflix is just going to borrow another 10 or 15 billion more than it planned on borrowing and is going to pay all cash. Now remember Netflix is in very round numbers. A half a trillion dollar market cap company. Okay, Paramount skydance is a I think 20 billion. It's it's it's it's it's magnitude smaller. So for them to, you know, kind of come up with the cash and so forth, and that Paramount is, is a lot different than Netflix coming up with cash. So that's kind of where the deal stand Netflix says in all cash offer, but the price hasn't changed, it's still 2775, just all cash and Paramount sky and answers offering 30 and you know, 30 greater than 28. So you kind of think oh why did they do that? Why why don't they take the 30? You know, and and so that's for you to tell me what what's going on there. So one of the things is That. It came out. Netflix offer is 2775 for the streaming and Studios and then shareholders get to keep the cable versus Paramount 30 for the whole thing. So, you think that the issue here is, what are the cable worth? If you think the cable or worth more with the combined 2775, you two bucks a share, right? Exactly. And this is where it gets Interesting. Because first of all, what Warner just disclosed just disclosed like, they just put out this proxy was they have a lot of debt. And so a big question was where the debt goes, does Netflix, buy the debt, or does the debt go on the stub shares of the cable assets? Well, it turns out now they're planning on saying, around 17 billion of the debt goes on the cable assets. Oh, but. But um, if after shareholders vote after this deal is like, basically gonna get done when they're actually doing the spin-off. Warner's board has discretion to decide that for whatever reason, something something that actually more debt, should be allocated to the cable assets. And if they decide to pull the debt off the cape or sorry, less Stitch, should I lie less should be okay to the cable assets. So, if Warner decides in set of 17 billion on the cable assets, it's going to put 15 billion on the cable assets. Then that extra two billion or so goes to what Netflix is buying. And if they do that Netflix reduces the price which means that if you're a shareholder voting on this Netflix deal, you don't actually know what you're getting. You may get 2775 plus the cable assets with 17 billion dollar debt, but you may get 26. 75 with. Your shareholder. You got less cash but all you get shares of cable company that has let them on it so that you shouldn't care. That's basically Warner's position. Not sure that math is. That's right. Yeah, we I would care, I would care because the idea is, is that Netflix eventually she's going to spin off this cable unit. They're not going to want to keep it. No, the Netflix doesn't get the cable, I mean, right. But eventually it's gonna, it's not gonna. They're something's gonna happen to it, right? But it's one of the things that will be acquired Right. But but I think, you know, depending on what how you view, the cable assets, the value of the cable assets, I mean, I'm not sure that like for you. It like, I mean, I assume for you, it actually does make a difference, whether it's cable assets with 17 billion dollar debt Plus 27.75 in cash versus cable assets with them making up a number 15 billion dollars in debt. Plus less money from Netflix, right? It matters? Yes, absolutely. The debt is, you know, you know, the debt influences, the valuation of those cable assets, right? So, anyway, but but but Warner. But that's basically the situation now, the but all of it comes down to. Do you think that the cable assets are worth more than the total value? The Paramount's offering so Paramount? Of course, put out this head, well, they've been, they've been all over the place saying, yeah, this is their worth a whatever they are worthless. They're literally, They worthless, I mean, then they sort of allow for the possibility of up to 50 cents per share. But they basically say that the cable assets are worthless and Warner. It says that the cable assets are actually worth anything from a dollar 33 to 686. That is a very big so, but the thing is that it Bears out paramounts fake tender offer is conditioned on Warner, not spinning off the cable assets, they don't want the company and if Warner is going to spin off the cable assets, first, right? To, which my response is. Well, if they're really worth noting, why is it that you are insisting? That Warner? Keep them so that you can acquire them, they have to be worth, right? This is worth. This is the easiest thing in the world to solve the Paramount really thinks the cable assets are worth noting, let Wern success. Paramount offer is for 30 dollars for the rest. Netflix offer is 27.75 for the rest. They exactly, it's very clear how you write these offers but of course is saying no, they're worthless but also we really want them, right? And that's that's fairly that happens a lot. We're so that's worth noting but give it to us anyway, exactly. So, all right, I there's two questions here. First is and there's there's reasons why the board picked one over the other that have that explain and I'll get to that in a second, but let me ask you something. That you said a moment ago about this tender offer being kind of fake. Yeah. So what, what is, what do you mean by that? It's tender into anything. To talk about the regulatory approval piece, right? It's conditioned on Paramount, getting regulatory approval, and it's conditioned on reaching a friendly merger agreement with water as in, they will not accept the shares unless Warner jilt, Netflix and signs a deal with Paramount and there's Breakers enormous a whole bit about that as well. So, but so this Pander offer isn't actually an invitation, for shareholders to Tender their shares. It's an invitation for Warner's board to agree to Paramount's offer which is standard these days. No one actually does true hostile takeovers anymore. They don't actually make tender offers with all actually accept the shares and that's because Warner can just adopt a poison pill to block it. There's no point like you can't complete a hostile tender offer anymore. Right? Why do they do it first? They demonstrate the Paramount of serious. This is their way of talking to shareholders and saying we are serious about this and so shareholders. You should go Lobby Warner, right? There's a, there's a lifetime undergoing and something like seven. Percent of the shares, have already tendered into it. because they, Respond and what's Warner is legally obligated to respond. It has to give all of its reasons for rejecting Paramount publicly and it has to keep those filings updated. If there are any material changes in its in its stance. So, it's basically forcing Werner to act under a microscope that Paramount can watch. So that's why you do this. So, that's the point, is that every now and then, there's a headline, like, only a few shares of tendered in. And that means shareholders, prefer, Warners offer or Paramount extended the deadline and that's silly. It's not a real offer. No, it's gonna tender into it. And part of the, I mean, a few have to show their support, but it's not real. And the other reason they won't is because Paramount's openly said, if Warren negotiates with us will pay more, like, why are we willing to that? We're willing to increase our bids. So Netflix by the way. But yeah. So I mean, the thing is that the legal standard Here will get to. That there's nothing that can force Warner to accept Paramount's offer Warner board is a lot of discretion to say we are going to turn Paramount down but if the shareholders but but what will really if nothing else, the thing that will really Force Warner to the table with Paramount is if it becomes clear that shareholders are going to vote down the Netflix offer, or if they actually vote down the net, right? And that's not looking, it's not looking good, but who knows? Well, waterfall. That's preliminary proxy. And we'll see and Paramount is all soliciting shares again. Well, yeah, well, I want to talk about that little while. So yeah. So but so, but, and also Check the Netflix deal. border is just Presumably will voluntarily break it off with Netflix. So this happened with Spirit, you remember, very sure how to deal with Frontier. JetBlue made a topping offer Spirit preferred the frontier deal. But it became very obvious that shareholders were going to vote down from tier because they preferred JetBlue. And just fear it. Voluntarily broken up with Frontier signed with JetBlue that never went through because of antitrust clearance, which we have talked about for this, that's what our next question is. Yes good and it never and then Spirit went bankrupt. So that didn't work out. Well. Okay, so let's get to the main reason or the the big, the regulatory stuff or the regulatory stuff A Reason. Okay. It is an issue. So one of the big issues for both offers is regulatory risk and the big regulatory risk here is antitrust. Both deals can't go through. Unless there are by antitrust Regulators in the United States and in Europe and both of them have antitrust concerns like they're both their NHS concerned for both deals but and this is where I'm not an Trust expert. So I really cannot get into the details because it's just not my field. But from what I've seen, the antitrust concerns are bigger for Netflix and for Paramount, they both have concerns. But Netflix is really, it's a bigger deal. So both Netflix and Paramount have agreed that. If Regulators don't approve their offers, they will pay reverse termination fee of 5.8 billion dollars to Warner. So if whichever ones designed with if it's blocked by antitrust Regulators the acquirer has to pay 5.8 billion to Warner. Right? But and this is interesting. They also both have to make promises and this is right there in the merger agreement about how hard they'll try to get regulatory approval before they give up. And that's a standard feature in merger agreement, like, okay, you have to get regulatory approval. How much you going to try to get it? Like what kind of concessions will you make? Paramount says it will do whatever is necessary. I mean both of them agree to litigate, but Paramount says, ultimately if necessary to get the deal done, it will agree to anything Regulators demand, like spinning off assets, break, you know, limiting contracts, whatever it is Criminal, do anything up until the point where there's going to be a material adverse effect on the combined companies and that as we know from other material, adverse effect. That's a very high standard real adverse effect. You have to get really down the damaging before accounts is a material library is effect. So practical matter, Paramount of saying we'll do a lot. That's not what Netflix is saying. Netflix is saying that it will do. Whatever is necessary to get this deal through the regular Regulators up until the point where it has a material adverse effect on Warner. But it is not agreeing to make any concessions to its own business for Regulators. Still run. So not only is Netflix have greater sort of antitrust risk, just at the outset but it's also limited. How many concessions it's promised to make to get this through the antitrust Regulators, which is one of the things that is pointing out that sad, there's this huge elephant in the room, which is nothing happens, without regulatory approval. And I don't know the situation in Europe, but it's very obvious that there's a political aspect to this. The Trump Administration wants Paramount to buy water and the reason it wants that is because that puts the ellisons who are Trump allies and charges CNN, and they are hoping that they'll like fire. All the anti-trump commentators on CNN, where is, okay? So The Regulators have been made a lot of noises about not like in the Netflix bid but I don't think a lot of that is coming from a place of actually being concerned about and I trust the Netflix bid means. CNN gets to live in its current form. Yeah, doesn't. And that Shouldn't be a consideration that should not be part of what's going on here but it but it is it's a rear backdrop and when you are a shareholder trying to decide between which offers likely to get make it through regulatory clearance. Well it looks like Paramount to me for the politics. It's a bad reason but it's real right? And that's very interesting. I only heard a little bit about I mean I could guess because who Paramount skydance is, but yeah, that's and that's increasingly a fact of life with deal-making deals. They're getting the lobbyists involved right away. Right? Because they know that, you know, it's the deal. Yeah. It's to see how the Trump Administration is going to react on a very personalist level. All right, is there any anything else to say before? We take a quick break about, what Warner Brothers is, kind of dealing with here, kind of legally. Yeah, so I mean the thing is that Warner is selling itself. It has to pick the highest like get the best attainable price for the company and its chosen Netflix and part, because of how it values the cable assets, what it can't do is lock Paramount out of the bidding. If the Netflix deal is inferior to paramounts, as long as it's choosing between those two deals, it has to pick the highest one, and it has to let Paramount, you know, make its case. But if shareholders vote, Netflix out down, let's say, shareholders vote Netflix down, Warner, technically doesn't have to accept Paramount. It could still just say, no, we don't want to sell then it is. Where could we open the bidding? It is, it is all sorts of things it could do. Yeah. But what it probably can't. So this is why the only thing to do and we'll talk about this because this is like your thing is, if even if shareholders were direct Netflix, the only thing that Paramount can actually do two Force. This actually Force Werner to accept the Paramount bid is a proxy contest. And which that's one of the things that it's right, and it's talked about that a little bit, but will return to that little while so. All right, so Warner Brother has Warner Warner Has. I mean they've got an interesting situation. I got an asset there can make some money off of. But they're really gotten kind of stuck between the it's clear that they want Netflix. I mean, it's I mean, for various reasons, I mean, other reasons in their proxy, they're just very well. They're strange, right? But and so they're but, you know, they're running up against, you know, some civic affairs, and some legal requirements, and so forth. So, wow. All right, let's um, let's let's return to this because we'll talk more about some of the activists and some of the litigation aspects of this after a quick break here at shareholder Primacy. Primacy is brought to you by free float and lyrics.com Directors, their influ. And their performance. If you own a stock or retirement plan go to free float, analytics.com and look up which of your elected directors are performing well, which aren't use your vote in the alternative democracy and get your data at free. Float analytics.com. Now, back to the show, Well, welcome back to shelter Prim. About. Are Netflix and Paramount. Yes, we are. So, so we, we kind of set the scene with the deal and the economics of it, and some of the, the deal legalities, but some other stuff has happened that we want to talk about. There's some litigation that's kind of unfolded. And then there's some, you know, more pure activist aspects to this, which is a little unexpected, but not not completely. So, let's talk a little bit about who's suing whom Here, I actually think that particular lawsuit is mood, but some of it's interesting. So when we're in our first rejected Paramount software, it didn't include all the financial details of the Netflix deal and particular, they didn't tell you what was going to happen to the debt. Now, we know and it didn't explain, how Warner was valuing the cable assets. So Paramount, filed this lawsuit to force Warner, to disclose this information and Paramount's argument was Warner was asking shareholders to take action reject its own tender offer, but wasn't giving shareholders enough information to make the decision. Oh, Warner's argument was there was no action for shareholders to take because Paramount's tender offers fake. Oh okay. And that's and what actually what Vice chancellors earned held and the thing about bench trolling in these kinds of Rush situations, sometimes they're not like you know fully fleshed out and reason. But what she held was a little weird, what she held was What there was actually a motion for Paramount to expedite, all of this, to make it really quick because they were in a big rush and what Vice chancellors earned the request to expedite, you know on a sort of weird reason she said that Paramount as the bitter had no standing to bring a lawsuit based on Warner's breach of fiduciary duties to its own shareholders. This is Delaware doesn't allow disappointed bidders to bring claims and that's Can't be right? I mean first of all, Rebel was a disappointed bitter. Like and that's like the classic takeover battle that's settled rights. All the company and there was a disappointed but also A lot of pointed bitter. Like Paramount's own lawsuit against time, back in the late 80s, they include the disappointed bidder and often a shareholder class at the same time but usually courts treat the shareholder class as an afterthought. They really just focus on the disappointed bidder so it can't really be the disappointed. Bidders are not able to Sue when they're being unreasonably blocked. But I do think if you take her ruling as narrow narrower to mean something like Paramount, as a disappointed bidder doesn't get to Sue that Warner didn't disclose enough information to its own shareholders. Like Paramount, if it doesn't think there's enough information, Paramount is the one who gets to talk more but it can't really say Warner is not talking enough to its own shareholders. So I think she kind of overstated that one, but, but so I think that if this continues to proceed, it's, I mean, you could, let's just say, I would not imagine that Paramount is boxed out from bringing a lawsuit saying that Warner is violating. Its fiduciary duty. Duty substantively not just on a disclosure basis by preferring an inferior Financial offer, which gets to the question of whether it actually is inferior. Right? And that's not clear because of the structure, the deal because of the cable assets. And because the regulatory risk Yeah, well, yeah, but it's just, it's particularly odd because Paramount, one of their complaints is Warner, won't even talk to us and we're willing to bid more. So there's so there's this. Well, there's no negotiation going on, but I don't think they're, I mean, you talked about Warner's obligations a little while ago, but one of them is not, we have to continue to go with a bitter, we've rejected. Is it? No It is price. And so the question is, why if they can't possibly know in those absolute sense that Paramount, they don't know what Paramount's actual Reserve prices, which means they can't possibly know for sure that bidding with them won't get a financially Superior offer. So you have to ask why they aren't negotiating or at least they don't appear to be negotiating. At least from the outside. That's seems to be Paramount's complain. And the reasons that it's giving I mean I gotta say they're getting stranger and stranger. Yeah, most of Warners reasons for not negotiating. Boil down to if it breaks the deal with Netflix signs with Paramount. And then the Paramount deal doesn't go through Warner will be in a much worse position than before worse than it. Even would be if the Netflix deals fail. I never come up. Okay, yeah, right. And the reason for that is if Regulators block the Netflix deal, regulator Netflix has to pay Werner, 5.8 billion, and then Warner Goes ahead with its original spin-off plan, right? But if Warner abandons Netflix first it Has a 2.8 billion dollar break fee and Paramount won't reimburse that fee. Fine. If the Paramount deal goes through it doesn't matter if the Paramount deal goes through, but if the Paramount deal is blocked by Regulators Paramount, pays the same same 5.8 billion brake fee. That Netflix will only now Warners already in the hole by 2.8 billion. in its So, they're not on the on the brake fees is the last and Warner. Even French. The recent fight that we Put between Pfizer and Novo Nordisk and Madera. Sure, there are Nova was willing to reimburse the break fee. If not Sarah abandoned fire but here Paramount won't and there's another issue. Paramount has these operating Covenant that it wants Warner to stick to between signing and closing. And in particular, these are about debt because I mean you started to talk about Paramount doesn't have nearly as much money as Netflix does. So it's right, this is a highly leveraged offer. It's very few old, buy a lot of borrowing and as a result Paramount really wants Warner to minimize its debt levels. Once the deal closes. So if Warner signs with Paramount, it has to agree to get rid of debt and not restructure, certain debt that it won't that Warner doesn't want to do. so basic Paramount basically wants Warner, to reduce its debt levels before closing, which is reasonable given Paramount overly leveraged situation but Warners fear. What says it's fear is that, if it doesn't close with Paramount, we've really screwed ourselves on our debt management, right? We can't go through, we have avoid it, we have it, we haven't done any of this debt management, we could have been doing and then we're right, and we can and they can't do and we won't be able to do. This so um, so basically these aren't crazy objections but these objections are entirely predicated on the idea that we might. Even if we sign with Paramount, it may not go through. That's what basically it boils down to it means we're going to be in this tear. If we sign with Paramount, we will be in a terrible position if the deal doesn't go through. So that begs the question, are they write? Is it likely that if they sign with Paramount or How likely is it, right? How likely otherwise none of these make sense? Now why do they think that the Paramount deal won't go through? Well, at first originally their objection was that the Paramount Consortium funding, this included far and investors and that would create National Security like regulatory risks from like National Security review. So Paramount got rid of the far in investors. Now it's just the elephant family and Redbird capital and like American Banks, right? Paramount promised that it won't Syndicate any of this to foreign investors if doing. So would risk deal approval and Warner openly says, we think your line like they say, they don't believe, we don't believe you, don't believe you. Don't feel as partly financed by the Ellison Family Trust. Like you know this is the big trust that holds all the elements and Warner said not good. Enough. We need Allison's. We need Allison's. We actually talked about this. We need our actual actual money. We don't need a trust, right? And at first, the elephants wouldn't say that a Larry Ellison was personally liable. it's a weird thing to think that might happen that Ellison's gonna pull those money out of the trust so that the trust is like doesn't have any assets but now the ellisons have agreed lela's Ellison is guaranteeing, the money that's not an objection anymore but there are still more objections As both. So, both companies Netflix and Paramount can break off the deal. If Warner experiences a material adverse effect, that's pretty standard. That's you know, it's always true. Both companies can break out the broke up, the deal of Warner experience of material after effect. Very high bar but it can happen. But Netflix Only buying part of the company, the streaming and Studios part, which means Netflix will only pull out. If there's a material adverse effect on streaming and Studios, Paramount, however, will pull out if there's a material adverse effect on the whole thing, anything else is also buying the cable asset. So, Warner saying there is a greater risk. Paramount will pull the material adverse effect Clause because it is judging the material actually exercise that Clause, right? Yes. Well because of the because of the cable assets are included but I mean, sure, but one case in Delaware, history has ever found a material adverse effect. I mean, How likely is that? I'm like, yes. Warner says it's worried because the Paramount deal is extremely highly leveraged. It includes 54 billion dollars in debt from City group and Bank of America. There's a whole there's a whole there's a host indication they did where they promised exactly. And caramel and Incredibly. Owner shareholder is. Why do you care? Yeah. Who cares? I'm gonna cause I'm gonna get cash, right? Exactly. Exactly accessories. Financial condition is so over leveraged, as a result of all this, that the lenders might back out the elephants might oh, so between between a green and closing, they're worried that the lender will look at the debt the Deathstroke and say, okay, we weren't serious, we didn't Also, they're that the ellisons will take another look and change their minds. Do you think it's likely that Citigroup Bank of America and the look at this deal? Not a not, if not, if they want to do future leverage deals with anybody. Exactly and Paramount also and Warner Brothers is also pointing out like, they're really going to like, finding everything they can. They're pointing out that Paramount, just signed new deals with UFC and South Park that will drain its cash flow. So that to try to sound make it sound really the city group is gonna suddenly, just wait a minute, you're that leverage, I can't and we just we started a new this but yeah. Okay. That's just Well, and he's not part of this one. So strikes me these do not strike me as particularly robust for doubting that the Paramount deal would actually go through. Um what seems quite real though? Is Warner's board doesn't like the elephants and I don't mean personally I mean they resent the tactics the Paramount has employed and they openly say they don't trust Paramount they think Paramount started making threats right out of the gate by publicly accusing them of violating their fiduciary duty early in the process and they point out that Paramount's deal council is Queen Emmanuel, that's not a deal for them. They're a litigation firm and they point out the queen of manual is the firm that repped musk, when he tried to get a deal, right? So they say Paramount's, entire aggressive approach here, makes Warner doubt them, and it's the kind of thing that makes them not trust. The Paramount, won't suddenly pull out or try to get out of the deal or try to litigate it until the debt covenants and expire. Like that's basically what it comes down to. So they're coming up with all these reasons why they think this deal won't actually close with Paramount, but a lot of it has to do with. They think Paramount has just approached this in a way that gives them. No it's just sort of sort of sort Of its this broad very broad accusation of kind of bad faith. Exactly. That's a yeah. So that's basically their reasons and now we have Paramount threatening activism as you say, alright, well, and that's, that's what we want to kind of cover for moment. Is that there was at least two. Different activist. Efforts made here. So there's actually, so, you know, the first thing that's going on, is this tender this fake tender. That's not really active. As they're just trying to, you know, buy the shares. But there's some really strange conditions attached to the actual closing of the acquisition of the shares. There's at least two other things, one that's been hinted at and one that's been announced. The announced one is Paramount is actively soliciting in opposition to the deal. So Warner. As published, you know, plenty because Warner shareholders have to approve this. And so Paramount is out there jumping up and down or going to start to jump up and down in front of Paramount, shareholders. And start to say, this is a bad deals. Don't approve. This is not. They're not saying I mean they may say ours is better. Yeah, that's the that's the implication, right? The implications. But they're trying to solicit proxies, right? So they are, they are trying to compete with Warner Brothers to collect vote. From. Warner Bros shareholders, they've hired a really good proxy solicitor ocopy, and it looks like they're, you know, they can afford it, they're gonna really do an effort here, so that is according to Warner, but all right. But that's so that's happening. That's happening Paramount, and this is this Harkens back to like, you know, this is stuff that wasn't even tried in the 80s. The thing that was tried in the 80s when this was very popular, was the thing that they hinted at, but haven't done yet, which is running. A competing slate of directors at a Warner Brothers, shareholder meeting. You know what that would take place? so, while the meeting, The meeting would be like in a May June. Yes, so that's the thing is probably going to be April. Oh, it's going to be it's yeah. They're gonna schedule the Netflix vote for sooner and there you know, because it's a special meeting. The Warner Brothers is in control of the agenda and of course they're not going to put direct elections on that but if somehow that word to get knocked around or something, Warner Paramount has said we're going to also run competing directors. Now they have until February 2nd. That's when that's the deadline to submit a notice to Warner, Brothers of its nominees. So, I'm guessing that's ready to go. And they probably have a bunch of nominees already lined up. They haven't announced it yet. They kind of hinted at an Israel. I can't remember where I saw it. But they've said we're going to do this now. Again, they're timing could be way off because they may be working on directors, after the deal gets approved like because as I said, if the shareholder there so listening, both against the Netflix deal, if the shareholders vote in favour, the Netflix deal. It's obvious that they're saying we were rejecting you Paramount, right? The shareholders vote against the Netflix deal, right? Shareholder saying we want the Paramount to you. Yes. But What? But as I said Warner, can't like Paramount Camp Force, warn her to accept Paramount. Even if Netflix is voted down, they would probably accept Paramount if Netflix is voted down, but we don't know that for sure, right? And and giving the current given the current Warner Brothers board, they may really dig their feet in its special and figure out ways to do this. Yeah, angry with Paramount, right? And so, so the way for Paramount to kind of push this forward assuming they can in this case. So listen enough votes in opposition because you know again right. Well that what they'll do is they'll then say okay we're you know we we've got enough support. From shareholders to reject the deal that sort of means translates to enough support to put in a bunch more friendly directors. Exactly. Yeah. I mean, it's interesting because you wouldn't think they'd have to do both. You think that voting down Netflix would be enough? Because that's a pretty strong signal to Warner, but Also running a direct or contest is like, you know, really that's a whole that's that's a whole different order of magnitude. Yeah, exactly. So anyway, so we'll see. So the next Milestone amid, all the almost daily like, you know, news releases and social media posts and so forth will be weather. Paramount, announces a board slate on before February 2nd or whether Warner Brothers announces announces that they've fixed that they've nominated directors. Or if I'm just decides to leave it at will compete over the Netflix. I mean, if the Cheryl just vote down Netflix, I think it's really likely. Warner's gonna go back to the bargaining table with power. Probably, right? And, and in this kind of case. It's absolutely not clear. You know how it's going to be valued and so forth. We're talking about some fairly nuanced issues that most shareholders. At least read and I don't know what the retail shareholder basis. It's not big, but but trying to, you know, appeal to, you know, all the different institutions and so forth and try to say in our deal is better know the regulatory. So it gets, it gets really into the weeds really quick. So, it'll be interesting to start to see how it goes, okay? So February 2nd, the next date and then hopefully, we'll get a little more clarity about. You know, what, each of the players wants to do so, all right, cool. All right, let's, uh, let's put this aside. We have to revisit this at some time soon but this is a lot, there's a lot going on. So this is shareholder Primacy hosted by and Lipton and me Mike Levin. I'm an independent activist investor and advisor to investors about their activists situation, and is Professor of law and the Lawrence wuth chair of Business Law at the University of Colorado law school. You can find me Mike at the activist investor.com and Anne at lot colorado.edu. Our podcast is produced and distributed by free float media. Thanks for listening. We will talk again.