Merger Math: Paramount Suit Wants WBD To Show Its Work

Paramount has sued Warner Bros. Discovery seeking specific numbers and calculations the board used to rebuff its $30 a share cash offer in favor of a deal with Netflix, claiming WBD advised shareholders to reject its tender offer “without disclosing basic, fundamental pieces of information.” Like in math class, it wants WBD to show its work.

The suit in Delaware Chancery Court asks the judge to expedite the case with the deadline for WBD stockholders to tender their shares looming Jan. 21.

“WBD’s stockholders have an immediate need for the material information being withheld in order to make a decision on Paramount’s tender offer to them. This additional material information, including information that the Board purports to rely on but has withheld from view, will confirm what many already know: WBD stockholders should reject the recommendation of the Board and accept Paramount’s value maximizing tender offer for their shares,” alleges the legal filing by the David Ellison-run company.

Paramount, which had six offers rejected by WBD, also said it’s planning a proxy fight to install its own slate of directors on the board to try to dismantle the Netflix deal and close its own.

WBD shot back that, “Despite 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.” Instead, claims WBD, “Paramount Skydance is seeking to distract with a meritless lawsuit and attacks on a board that has delivered an unprecedented amount of shareholder value. In 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.”

Hollywood isn’t at all happy with the prospect of more consolidation and insiders are having a hard time picking sides or handicapping either deal. Some Wall Streeters do think WBD should engage with Paramount on its latest offer. Matt Halbower, CEO of Pentwater Capital Management, a Warner Bros. shareholder, told CNBC recently that “If Paramount goes away, then it is a lost opportunity.” It also might be hard to argue that the WBD board has delivered “unprecedented” shareholder value since Discovery and Warner Media merged.

In any case, Paramount is not going away.

The company’s lawsuit wants WBD to lay out the following:

-The value or value range ascribed to the Global Networks business, including valuation materials and underlying projections by WBD management or financial advisors.

-Specific terms of the net debt adjustment in the Netflix merger agreement pursuant to which net debt on the streaming and studios business in excess of an undisclosed target will reduce the consideration payable to WBD stockholders, including such net debt target, and the level of such net debt assumed in the financial analyses provided to the board by WBD management or financial advisors. The net debt of Global Networks at the time of the separation is a key unknown.

-All analyses, estimates, or projections provided to the board in respect of anticipated financing or bank costs should WBD not complete its proposed spin-off of the Global Networks business to form the basis for the conclusion that WBD will face sunk costs by abandoning its planned separation and distribution.

-Any analyses, estimates or projections provided to the board in respect of anticipated financing or bank costs upon the completion of the Global Networks spin-off, or upon the failure of completion of the Netflix transaction. “While pointing to the opportunity cost from abandoning its planned separation of Global Networks, the Board failed to disclose the financial impacts and opportunity costs from a failed Netflix transaction, prohibiting a fair comparison between the two deals,” claims Par.

-A fair summary of the substantive work performed by any financial advisor in connection with any opinion rendered to the board related to the value of the Paramount offer, the Netflix merger, and/or Global Networks

-Qualitative or quantitative “risk adjustment” factors that the board considered or applied in concluding that the “risk adjusted value of the Paramount offer is not superior to the Netflix merger, “including the relative probability and magnitude of such risk factors, all quantitative adjustments to any valuation analyses on the basis of such factors, and how such factors were derived or calculated, and including whether and how any such “risk adjustment” factors were applied in valuing the Netflix merger.”

Par said “WBD also indicates that it believes Paramount’s debt financing is insecure because the banks—Bank of America, Citigroup, and Apollo Capital Management—might breach their market-standard contractual commitments. In making this assertion, the Board did not explain what analysis it relied upon to conclude those three financing sources are more likely to breach their fully enforceable contractual obligations than Netflix’s debt financing sources—Wells Fargo, HSBC, and BNP.”

The suit maintains that, “This discrete information should be easily and readily ascertainable, and can be swiftly disclosed (indeed, it should have been disclosed already). The Board must already have it and have considered it prior to recommending stockholder action (or, if it did not, that fact is just as significant and readily available). It is the urgency of these disclosures, and the potential for swift resolution by this Court on this narrow ground, that compels Paramount to bring this limited action now.”