Warner Bros. (WBD.US) tough “rejects the enemy”: Letter to shareholders recommending Netflix (NFLX.US), Paramount (PSKY.US) plan is “poor quality and dangerous”

The Zhitong Finance App learned that, according to news, HBO and CNN's parent company Warner Bros. Exploration (WBD.US) are recommending that its shareholders reject the hostile takeover offer from Paramount Tianmu (PSKY.US) and instead support its original agreement with streaming giant NFLX.US (NFLX.US), and believe that Paramount's offer is “worse” and “insufficient.”

After the Warner Bros. board of directors agreed to sell its streaming media and film studio business to Netflix, CBS and Nickelodeon's parent company Paramount have been making direct offers to Warner Bros. shareholders to buy the entire company. Warner Brothers plans to split cable networks such as CNN and TNT into independent companies before completing the Netflix deal.

Paramount, controlled by software billionaire Larry Ellison and his son David, is competing with Netflix, the world's most valuable entertainment company, to acquire Warner Bros., one of Hollywood's most legendary studios, and HBO, the crown jewel of the television business. Both Paramount and Netflix executives claim they will be the best owners and will be able to enhance their streaming business with the coveted Warner Bros. film library.

However, the Warner Bros. board of directors raised a number of concerns about Paramount's takeover offer, including its uncertain financing arrangements and the risk that Paramount could terminate the deal at any time. Paramount offered a cash purchase offer of $30 per share for the entire company, including cable networks. According to the deal with Netflix, Warner Bros. shareholders will receive $27.75 per share of Canafi shares in cash, as well as shares in the new company holding Warner Bros. Cable Television Network.

The Warner Bros. board of directors pointed out the risks in the Paramount offer, including the Ellison family's failure to fully support their $407 billion equity commitment. The board of directors said in a letter to shareholders on Wednesday that this portion of the shares is supported by “an unknown and opaque revocable trust.” Documents provided by Paramount “have gaps, gaps, and limitations that put you — our shareholders — and our company at risk.”

The board said the terms of the Paramount offer included restrictions on Warner Bros., such as its ability to refinance debt. The deal also required Warner Brothers to pay Netflix a $2.8 billion termination fee.

The Warner Bros. board of directors wrote that Paramount's offer “is still inferior to the merger with Netflix.” The board of directors unanimously recommended the Netflix deal, saying “the terms of the Netflix merger are better,” while Paramount's offer “provides insufficient value and imposes a number of significant risks and costs.”

Netflix wrote to Warner Bros. shareholders on Wednesday morning, reaffirming its better offer and urging them to approve the agreement. Netflix Co-CEO Ted Sarandos wrote: “The Warner Bros. Exploration Board once again confirmed that Netflix's merger agreement is better and that our acquisition is in the best interest of shareholders.”

Warner Bros. shares fell 1.1% to $28.59 in pre-market trading. Netflix shares rose 1.4%, and Paramount shares fell 1.8%.

According to regulatory documents, Paramount CEO David Ellison has offered to acquire Warner Bros. several times. The first proposal was during a meeting with Warner Bros. CEO David Zaslav on September 14. The board declined the offer, but Ellison's continued pursuit over the next month (including two price increases) aroused interest from Netflix, Comcast, and other undisclosed parties.

The engagement of potential bidders prompted the Warner Bros. board of directors to launch a strategic assessment and private negotiations with multiple suitors. Netflix, Comcast, and Paramount became the most serious bidders. Zaslav has met David Ellison or his father (co-founder of Oracle) several times.

David Ellison criticized the bidding process, accusing Warner Brothers of unfairly favoring Netflix. However, Warner Brothers portrayed Ellison and his son as aggressive and unorganized. The company submitted its offer after the deadline, failed to address many concerns about its offer, while threatening and soliciting management. Warner Bros. said it has repeatedly expressed concern over insufficient evidence that the Ellison family would support any deal. In contrast, Netflix addressed every concern of the board of directors.

Including the debt assumed, Paramount's bid valued Warner Bros. at $108.4 billion. Netflix's proposal values the assets it is seeking at around $82.7 billion; in addition, Warner Bros. investors will also receive the proceeds of the cable network spin-off. Some shareholders, including money manager Mario Gabelli, supported a competitive auction for Warner Brothers, believing that both Paramount and Netflix could raise their offers.

The takeover offers from both sides have raised concerns in Hollywood about the impact of further industry consolidation and attracted criticism across the political spectrum. A deal with either party would trigger months of regulatory scrutiny. Although Paramount insists its deal has the best chance of regulatory approval, Warner Brothers said it believes Netflix and Paramount are on equal footing in this regard.

The board said the cost cuts proposed by Paramount “will make Hollywood weaker, not stronger”.

Ellison's latest offer includes: the Ellison family's investment of 11.8 billion US dollars, three Middle Eastern sovereign wealth funds investment of 24 billion US dollars, and additional financing from Redbird Capital partners. Affinity Partners, an investment company founded by US President Donald Trump's son-in-law Jared Kushner, withdrew from this bidding process on Tuesday.