On Friday, Paramount announced it had agreed to halt its merger with Warner Bros. Discovery until June 7th at the latest while a judge considers a lawsuit from state attorneys general who sued to block the deal.
So why did Paramount make this decision? It seems to have been driven by an upcoming August 3rd hearing on the states’ request for a preliminary injunction in front of Judge Araceli Martínez-Olguín. Paramount seemed to believe it would have lost that ruling, which would like have pushed the eventual trial into next year. Especially given the judge’s public comments when she issued the initial 14-day TRO earlier this month.
In her ruling, she found the merger would give the combined companies a 27% share of the worldwide theatrical movie market. “On this combined firm market share alone, the Court is persuaded that it can presume the proposed merger is likely to violate antitrust laws,” she wrote.
As part of the merger delay agreement, Paramount also was also able to get the Writers Guild Of America (WGA) to drop its request for a preliminary injunction, which makes Paramount’s path forward in the courts a bit cleaner.
The next move in this process is the scheduling for a trial. Schedule proposals are due next Friday. Paramount is expected to ask for a November trial, while the state attorney generals are proposing a 2027 start date.
Why Did Paramount Make This Decision?
The question of why Paramount is taking this path has several different answers, depending on who you speak to. Proceeding with the trial and not simply dropping the merger plans suggests Paramount still believes it can win in court. On the other hand, if the merger falls apart, Paramount has agreed to pay a $7 billion termination fee, which is brutal hit for a company that has a current market cap of just over $9 billion.
But sticking with the merger plans brings its own costs for Paramount. In the final merger papers with Warner Bros. Discovery, it agreed to pay a so-called “ticking” fee of $7.7 million a day beginning October 1st until the merger closes. So Paramount is apparently betting that taking a chance on the merger being approved and paying the ticking fee is a better choice than giving up now and paying the massive termination fee.
Paramount executives are certainly talking a big game in public.
Politically conservative NY Post columnist Charles Gasparino has been a Ellison whisperer through this entire process, frequently reporting unnamed comments from sources in the Ellison camp that are designed to be aggressively optimistic in a way that might change the public narrative about the deal.
He certainly delivered in a piece posted yesterday, in which he argued David Ellison is prepared to fight and will never give up the battle:
According to Gasparino, Larry and David Ellison are playing the long game, and are planning on taking the battle all the way to the Supreme Court, where they anticipate they’ll receive a friendly decision.
What Is The Supreme Court Likely To Do In This Case?
This far out, anything that anyone says (including me) is just speculation. Still, despite its Trump-friendly reputation and the well-known pro-merger stance of several of the Justices, a positive ruling for Paramount isn’t guaranteed (or even likely).
This is one of those hot-button political issues the Court might decide they don’t want to wade into and they can opt to just decide not to take on the case – even on a emergency basis.
But there is also another political component to this as well. Elections are taking place this November, well before any possible Supreme Court involvement. And with Democrats likely to regain control of the House – and perhaps even the Senate – justices might decide to stay out of the case. Especially if the lower courts have already ruled against Paramount.
There has been a growing wave of criticism of the Supreme Court by Democrats, who have been arguing for term limits for Justices, along with an expanded number of justices. That talk would be more likely to become action if the Court weighs in on this case and rules for Paramount. And while that calculation in theory shouldn’t have an impact on the decision by the Supreme Court to take the case, in reality, the prospect of court reform will hang over all of it.
Do The States Have A Chance To Win The Lawsuit?
The short answer is yes. Nothing is guaranteed, but outside observers believe the anti-trust argument by the states has merit, especially when it comes the combination of the two company’s theatrical business and the consolidation of their linear channels.
And while it’s no guarantee of success, Judge Araceli Martínez-Olguín, who will hear the case, has already indicated that there is some reason to believe the states have a solid case.
The ultimate fate of this case might hinge on the discovery phase of the trial.
In an interview Friday evening with CNN’s Jake Tapper, California Attorney General Rob Bonta talked about what he hopes will happen during the trial’s discovery phase:
What Is The Chance Of A Settlement Between Paramount & The State AGs?
I suspect this is the scenario that Paramount is hoping will happen. That the state AGs will propose to Paramount that it spin-off some assets in exchange for dropping the lawsuit.
Which is a nice theory, although there is no indication the states have any interest in doing that at this point.
Paul Nary, an M&A and strategy professor at Wharton, wrote on X last night:
And that seems to be the general consensus from people following the case closely.
But even more importantly, it’s not clear what Paramount could give up that would make the state’s happy enough to settle the lawsuit. Ownership of CNN is a small component, but the states have already turned down that proposal.
The financials of this deal are built on Paramount acquiring WBD’s theatrical business as well as its linear networks. So what else is left that would really matter enough to move the dial?
Maybe you force Paramount to sell the famed Warner Bros studio lot. But doing that makes the Warner Bros. theatrical business a lot more complicated. Paramount could be forced to sell off the WB television production business, but that isn’t worth nearly as much without the studio and the connected library of titles and IP.
At this point, I’m not even sure what a deal would look like.
What Does All Of This Mean For Warner Bros. Discovery?
Well, WBD executives have been selling stock regularly over the past several months, so it’s clear that CEO David Zaslav and other C-Suite people have been hedging their bets.
But no matter what happens, it’s not a great development for Warner Bros. Discovery. This prolonged court battles freezes the company in place until there is a resolution and this is taking place at a time when the rest of the industry is evolving almost daily.
The worst case scenario is that the merger falls apart, leaving a severely-weakened company without a lot of options.
The hot take from entertainment industry analysts is that Netflix is likely to make a another bid for Warner Bros. Studios and streaming. But given the hatred of Netflix in the movie business and the aggressiveness of this lawsuit, what is the liklehood the streamer would take this on, even of they could acquire the business at a now-discounted rate?
Which is bad news for Warner Bros. Aside from Netflix, there aren’t any other likely suitors for even parts of the business. Amazon has MGM, Apple seems to have zero interest in any large media M&A and every other major player in the industry is already consolidating and shedding assets.
It’s certainly possible that some combination of hedge funds and asset management companies could come together to acquire WBD. But that almost ensure the company would eventually be stripped for parts.
While all of this is the best estimate of what may happen at this point in time, it’s a quickly changing and very dynamic story. For the latest updates, follow me here on Forbes and check out my daily TooMuchTV newsletter.