BREAKINGVIEWS-Ellisons tempt Netflix into a game of M&A chicken

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jonathan Guilford

NEW YORK, Feb 25 (Reuters Breakingviews) - Price is one thing; certainty is another. That’s the message from David Ellison, boss of ‘Mission: Impossible’ studio Paramount Skydance PSKY.O. On Tuesday, the company confirmed a new, higher offer for Hollywood conglomerate Warner Bros Discovery WBD.O, raising its $30-a-share proposal to $31. More importantly, Ellison offered greater security around a toppy debt load. It’s a risky move, but puts the onus on rival Netflix NFLX.O to assume some danger of its own.

The M&A brawl broke out after Netflix inked an $83 billion deal for most of WBD in December. While the streaming giant would spin off the HBO owner’s linear television networks to shareholders, topping up its $27.75 now-all-cash bid, Paramount launched a simpler offer for the whole company.

The case against Paramount is that it is overextending. Ellison’s company is worth about $11 billion, but it’s offering more thanfour times as much in equity, and over $50 billion in debt, for WBD. WBD boss David Zaslav first extracted a personal guarantee backstopping the equity slice from family patriarch Larry Ellison, who as the co-founder of tech giant Oracle sits on an enormously valuable pile of stock. Paramount now promises that, if there is an issue receiving a third-party opinion that the combined company will be solvent - thus threatening debt financing - it will contribute yet more equity to stabilize things.

A disaster scenario requiring the Ellisons to fund the entire deal by selling shares would imperil perhaps a quarter of Oracle’s outstanding stock at current prices. This is unlikely: Paramount can tap other equity funders, and financiers including Bank of America and buyout shop Apollo Global Management have offered bridge financing. Still, it's a sign of the lengths to which the family is willing to go, enough to get WBD to extend negotiations.

Netflix is now under pressure. The value of a networks spin-off, set to lumber under $17 billion of debt, is uncertain. The separation requires its own solvency opinion. As Paramount points out, if Netflix ends up assuming more leverage to assure the spin’s success, it will reduce its cash offer.

Netflix co-CEOs Ted Sarandos and Greg Peters could nix or soften that adjustment, or offer some other means of compensating shareholders if the spin-off is a dud. Simply acquiring the entire company would be the most straightforward path, even if Netflix abhors the idea. Add in that Paramount has, for now, cleared regulatory barriers in the United States, and there’s a lot of risk to trim.

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CONTEXT NEWS

Warner Bros Discovery said on February 24 that its board has determined that a revised bid from Paramount Skydance could reasonably be expected to lead to a “superior proposal,” as defined in its current agreement to be acquired by Netflix. As a result, the companies will continue to negotiate.

The media conglomerate in December agreed to sell most of its assets to Netflix for $83 billion in cash and stock — later amended to all-cash — while spinning off its linear television networks into a separate company. Paramount subsequently launched a hostile, all-cash tender offer for all of Warner Bros.

On February 17, Warner Bros said that Netflix had given it a waiver to negotiate with Paramount for seven days.

(Editing by Robert Cyran; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on GUILFORD/ Jonathan.Guilford@thomsonreuters.com))