Paramount CEO David Ellison’s WBD acquisition can’t clear final hurdle

David Ellison — the founder of a film production company and son of billionaire Larry Ellison — has been at the helm of Paramount Skydance for just over a year. He’s been fighting to acquire Warner Bros. Discovery for nearly as long.

The latest roadblock in his path, a group of state attorneys general seeking to stop the deal, may be his toughest yet. The antitrust hurdle and related delay have left the CEO hunting for avenues to get the deal done.

The delay in closing Paramount’s acquisition of WBD could add hefty costs on top of the $110 billion proposed price tag at a time when media companies across the landscape are under intense pressure.

Yet, with a trial in the antitrust case set for March, Ellison has never felt more confident that the deal not only makes sense, but will get completed, according to a person familiar with his thinking, who asked to remain unnamed to speak candidly.

“The company believes strongly in this,” Paramount’s lead trial attorney Jeffrey Kessler said on CNBC in July, adding the company was prepared to bring the matter to the Supreme Court if necessary.

Still, Ellison appears to be making little ground with California Attorney General Rob Bonta, who is leading the states’ charge in court. Both sides have said they are eager to make amends outside of the courtroom.

“I think the whole issue there is, will the state AGs be interested in settling, and I’m not quite sure there’s any real incentive for them to settle given the fact the California home constituency here is overwhelmingly against the transaction,” said Tom Rogers, a media veteran who’s currently senior advisor to Versant Media Group and executive chairman of AI film and TV production company Fountain 0.

A Paramount spokesperson declined to comment for this article.

Ellison’s pursuit of WBD began last September with three unsolicited bids to take over the storied entertainment company, which includes the legendary film studio, a portfolio of pay TV networks and the HBO Max streaming business.

Ellison’s interest ultimately spurred a formal sale process that superseded a plan by WBD to split in two. When Warner Bros. Discovery crowned Netflix the bidding war winner, Ellison went hostile and promised WBD shareholders a premium.

In February, Netflix abandoned its pending transaction and Paramount entered into an agreement to buy the entirely of WBD. The deal has won approval from all global regulators, including the Antitrust Division of the U.S. Department of Justice.

That leaves Bonta and the other 11 suing states as the final threat to Ellison’s long-sought-after acquisition.

Bonta has said his aim is in part to take up the baton where he feels President Donald Trump’s administration has fallen short on regulation. He has said Trump has gotten “involved improperly” in other merger situations.

Meanwhile, the Ellison family’s ties to Trump have drawn criticism. Larry Ellison is a longtime supporter of Trump, and the president has said publicly he’d like to see Warner Bros. Discovery’s CNN land in Paramount’s hands.

When speculation began in the spring that a group of states would seek to challenge the merger — putting particular focus on two segments of the combination: their extensive portfolios of pay TV networks and powerhouse film studios — Ellison’s Paramount immediately began its outreach to Bonta’s office, according to the person familiar with the matter. By mid-May the company had sent a list of potential concessions to Bonta, added the person.

Following a preliminary injunction granted by the California district court, which paused any movement on the deal for 14 days, Paramount said it was willing to officially delay the deal and move to a trial to fight its case for the merger.

However, the March trial date was later than company executives had hoped for, according to two people familiar with the matter.

In the ensuing weeks, Paramount went on the offensive.

Shortly after the lawsuit hit in mid-July, Ellison took his argument for the deal public, writing a New York Times op-ed. That piece followed others from industry leaders arguing both for and against the merger, expanding the debate beyond legal filings.

Ellison has also sought to win over Hollywood exhibitors with contracts guaranteeing that a combined Paramount-WBD would release a a minimum 30 films a year with 45-day theatrical windows for a period of at least three years, according to a person familiar with the contracts, who spoke on the condition of anonymity because they were not authorized to speak publicly.

And, reports surfaced that Paramount was considering relocating its studio and headquarters outside of California in response to Bonta’s challenge. One of the people familiar with the matter told CNBC a move to Tennessee was on the table.

That suggestion largely backfired, with Bonta calling the threat to relocate “blackmail.”

Last Thursday, the California AG said in a CNBC interview that he would be willing to hold talks outside of the courtroom, but that a settlement would require “robust structural remedies.”

The following day a meeting was held at Bonta’s office, according to a statement from the government official’s spokesperson. While another meeting was slated for Monday, media reports of the meeting and what an eventual settlement could entrail — such as divesting some pay TV networks — led Bonta to call off the discussions, his office said.

On Monday, a Bonta spokesperson alleged that Paramount was behind the “leak” of the parties’ discussions, which it further said were misrepresented, and said it demonstrated a “lack of good faith.”

“As soon as Paramount stops playing games and engages sincerely, my office is happy to meet again,” Bonta said.

Paramount responded later Monday denying it was the source of the leak.

“We remain hopeful and stand ready to continue good faith discussions to resolve the Attorneys General suit and move forward with our plans for increased competition and increased output to the benefit of the talent and entertainment workers,” the company said in a statement.

While the contents of Paramount’s list of concessions — as sent to Bonta’s office back in May — remain unclear, they appear to be in contrast to what Bonta and his peers have raised red flags about.

″[Paramount] wanted to talk about everything except for what this case is about. They want to talk about the streaming market, which we don’t allege in our complaint. They want to talk about CNN, which is not a focus of our complaint. They want to talk about the foreign regulators. We want to talk about the three markets that we set forth in our complaint, where we think there’s antitrust violation,” Bonta said in an interview with David Faber on CNBC last week.

Paramount has declined to discuss what possible remedies it set forth, with the exception of the commitments it’s made to the film industry.

In a July interview on CNBC, Paramount attorney Kessler said the company had been willing to put in writing that it would commit to 30 films per year, legitimatizing an earlier promise made by Ellison that struck some as unrealistic given Hollywood track records.

If Paramount were to fall short of that promise, it’d be opening itself up to litigation, Kessler said. That commitment became the underpinning for Paramount’s offer to sign contracts with Hollywood exhibitors, at least one of which took the offer, according to the person familiar.

In recent days, the Wall Street Journal reported the state AGs were seeking a divestiture of some of the pay TV networks included in the merger. The combination of Paramount and WBD would create the biggest portfolio of networks in the industry, and the states have argued that no matter the state of the business, that scale creates outsized power.

“Whether the market is shrinking or growing is really irrelevant,” Bonta said on CNBC last week, adding a combined Paramount-WBD would create a “presumptively illegal market concentration” in film and TV.

But the ongoing industry challenges — particularly for these two companies — has been the basis for Ellison’s push to merge. And it may be a better argument than Bonta would admit.

Industry analysts, experts and insiders have consistently poked holes in the states’ argument that the combination of TV networks would create antitrust issues.

“The merger does create a larger competitor, but size alone is not evidence of market position. Neither company has possessed the scale necessary to compete effectively against much larger global streaming platforms and well-funded technology companies,” Bernstein analysts said in a recent note.

Media companies’ most recent earnings reports — including those from WBD and Paramount — once again put on display the ongoing losses for pay TV advertising and distribution revenue streams.

Paramount’s chosen remedy is scale.

Both companies’ portfolios are made up of dozens of TV networks, with Paramount’s offering including channels like Nickelodeon, MTV and BET, and WBD owning channels like TNT, CNN, TBS and the Discovery Channel. Paramount also owns the broadcast network CBS.

“The economics of Pay-TV are being dictated by consumer behavior rather than consolidation. The merger may change the scale of a participant, but it does not change the direction of the industry’s secular trajectory,” the Bernstein analysts said.

It’s a similar story in streaming and films, where Paramount would similarly combined the two companies portfolios.

Ellison has said upon completion of the merger, Paramount+ and HBO Max would become one service. And the combined entity would encompass two major film studios. And yet neither company is dominating in either category.

“The states also argue that the combined company would control approximately 27% of US theatrical releases and roughly 30% of blockbuster film distribution. Those figures are certainly meaningful, but they fall well short of establishing a dominant market position. More importantly, theatrical market share is dependent on annual content slates,” the Bernstein analysts wrote.

Executives at the company believe the rate of pay TV decline is beginning to stabilize.

“The rate of decline of subscribers is starting to ebb, meaning we’re not quite there yet, but an ascent to where we’re going to steadily see a base of subscribers, I would say, probably in the mid-30 million range in the country,” said Andy Gordon, chief strategy officer and chief operating officer at Paramount, in a recent interview.

Still, a recent report from S&P Global Ratings notes that while the rate of cord cutting has improved in the U.S., it doesn’t see much improvement to leverage for these companies over the next couple of years, meaning media companies won’t have as much power in distribution discussions with pay TV operators.

And in general, despite subscriber losses, these channels are still profitable and often used to fund other parts of media businesses, such as building out streaming services or paying down heavy debt loads.

Since Warner Bros. and Discovery combined in 2022, the company has been aggressively repaying the debt that largely stemmed from that merger.

If Paramount’s acquisition of WBD were to close, the combined company would have nearly $80 billion in debt.

Delays past Sept. 30 would only increase the amount of expenses on Paramount’s plate as the company becomes responsible for a “ticking fee” due to WBD shareholders. Paramount has requested that the court force the suing states to post a bond of $1.88 billion to cover the fees and costs associated with the delay.

— CNBC’s Sarah Whitten contributed to this report.