Paramount CEO Faces Final Hurdle in Warner Bros. Discovery Acquisition

David Ellison, the head of Paramount and son of billionaire Larry Ellison, has been leading the charge to acquire Warner Bros. Discovery (WBD) for close to a year. Now, a group of state attorneys general seeking to block the deal presents his most significant challenge yet.

This antitrust obstacle and the resulting delays are forcing Ellison to explore new strategies to finalize the acquisition. The prolonged closing process for Paramount's purchase of WBD could significantly increase costs on top of the proposed $110 billion price tag, a concerning prospect given the current pressures on media companies.

Despite the complexities, Ellison remains confident that the deal is not only viable but will ultimately be completed, according to sources close to him. Paramount's lead trial attorney, Jeffrey Kessler, expressed this confidence in July, stating the company's readiness to take the matter to the Supreme Court if necessary.

Ellison appears to be facing an uphill battle with California Attorney General Rob Bonta, who is spearheading the states' legal action. While both sides have expressed a desire for an out-of-court resolution, a media veteran suggests that state AGs may lack a strong incentive to settle, particularly given the strong opposition from the California constituency.

The Final Threat

Ellison's pursuit of WBD began last September with an unsolicited bid for the media giant, which includes its renowned film studio, a suite of pay TV channels, and the HBO Max streaming service. Ellison's interest prompted a formal sale process, overshadowing WBD's previous plan to split into two separate companies.

After an initial bidding war where Netflix emerged as the frontrunner, Ellison launched a hostile bid, promising WBD shareholders a premium. Netflix eventually withdrew its offer in February, paving the way for Paramount to reach an agreement for the acquisition. The deal had secured approval from all global regulators, including the U.S. Department of Justice's Antitrust Division.

Currently, Bonta and the other 11 suing states represent the final hurdle for Ellison's long-sought acquisition. Bonta has stated his intention to uphold regulatory standards where he believes the Trump administration fell short, referencing past involvement in other merger situations.

The Ellison family's connections to former President Trump have also drawn scrutiny. Larry Ellison is a long-time supporter of Trump, and the former president has publicly expressed a desire for CNN to be part of Paramount.

As speculation grew in the spring about a potential challenge from a group of states, focusing on the combined portfolios of pay TV networks and film studios, Paramount promptly engaged with Bonta's office. By mid-May, the company had presented a list of potential concessions.

Following a preliminary injunction that temporarily halted the deal, Paramount agreed to an official delay and to proceed to trial. However, the March trial date was later than anticipated by company executives.

Paramount's Playbook

Following the mid-July lawsuit, Ellison took his case public with an op-ed in The New York Times, adding to the broader public debate surrounding the merger. He has also sought to gain support from Hollywood exhibitors by guaranteeing a minimum of 30 film releases annually with 45-day theatrical windows for at least three years.

Reports also surfaced that Paramount was considering relocating its studio and headquarters outside of California in response to Bonta's challenge, with a move to Tennessee being a possibility. Bonta, however, characterized this threat as "blackmail."

In a recent interview, Bonta expressed willingness to discuss an out-of-court settlement, but stressed that "robust structural remedies" would be necessary. A meeting was held at Bonta's office, but subsequent discussions were called off by Bonta's office after media reports about the meeting and potential settlement terms, such as divesting some pay TV networks. Bonta's office alleged that Paramount was behind a "leak" of the discussions and accused the company of a "lack of good faith."

Paramount denied leaking the information and expressed hope for continued "good faith discussions" to resolve the suit and proceed with plans for increased competition and output, benefiting talent and entertainment workers.

Coming to the Negotiating Table

While the specifics of Paramount's proposed concessions remain undisclosed, they appear to differ from the concerns raised by Bonta and his colleagues. Bonta indicated that Paramount focused on areas outside the scope of the complaint, such as the streaming market or CNN, rather than the core antitrust issues related to three specific markets identified in their suit.

Paramount has declined to detail its potential remedies, other than its commitments to the film industry. The company's attorney reiterated a written commitment to 30 film releases per year, a promise that had initially been met with skepticism. This commitment has formed the basis of Paramount's offer to sign contracts with Hollywood exhibitors.

Recent reports suggest that state AGs are seeking the divestiture of some pay TV networks. The merger would create the largest portfolio of networks in the industry, and the states argue that this scale grants excessive power. Bonta stated that market conditions, whether growing or shrinking, are irrelevant to the issue of market concentration.

However, the ongoing challenges within the industry, particularly for these two companies, are the foundation of Ellison's merger proposal and may prove to be a stronger argument than Bonta acknowledges.

Better Together

Industry experts have often questioned the states' argument that the combination of TV networks would lead to antitrust issues. Analysts suggest that while the merger creates a larger competitor, size alone does not indicate market dominance, and neither company possesses the scale to effectively compete against larger global platforms.

Recent earnings reports from both WBD and Paramount highlight ongoing losses in pay TV advertising and distribution revenue. Paramount's proposed solution is to achieve greater scale through the merger.

Both companies operate numerous TV networks, and the combined entity would include major film studios. However, neither company currently dominates these sectors. Analysts note that while the combined company might control a significant percentage of US theatrical releases and film distribution, this does not equate to a dominant market position, as theatrical market share is contingent on annual content slates.

Pay TV Profits

Paramount executives believe that the decline in pay TV subscriptions is beginning to stabilize. However, industry reports indicate limited improvement for these companies in the coming years, suggesting they will have less leverage in distribution discussions with pay TV operators.

Despite subscriber losses, these channels remain profitable and often fund other aspects of media businesses, such as streaming services or debt repayment. Warner Bros. Discovery has been aggressively repaying debt incurred from its merger. If Paramount's acquisition of WBD closes, the combined company would have nearly $80 billion in debt.

Delays beyond September 30 will incur additional expenses for Paramount, as it becomes responsible for a "ticking fee" to WBD shareholders. Paramount has requested that the court compel the suing states to post a bond of $1.88 billion to cover these potential fees and costs.