Warner Bros Discovery continues to advise against sale to Paramount

The board of directors of media group Warner Bros. Discovery (WBD) unanimously advises its shareholders against tendering their shares to Paramount Skydance. It is inadequate, of too low value, and simply too risky. Netflix's takeover offer is superior in many ways.

This is stated in a letter from the board of directors to WBD shareholders dated Wednesday. The committee is continuing with the takeover agreement concluded with Netflix. Netflix is to buy Warner Bros. and pay $23.25 in cash for each share, plus around $4.50 in its shares, for a total of approximately $83 billion.

Furthermore, existing WBD shareholders would retain the Discovery division, which is to continue to exist as an independent company named Discovery Global with sports rights and news channels. WBD may continue to operate independently until the takeover. Should the takeover fail, Netflix must pay WBD $5.8 billion in compensation.

Paramount offers more but less securely

Paramount Skydance (PSKY) does offer more money, namely $108 billion, but it also wants to swallow the entire WBD group, including Discovery. However, the offer has its catches, which the board of directors points out. On the one hand, according to PSKY's own statements, it needs at least a year, perhaps a year and a half, to complete the purchase. Meanwhile, WBD would have to curtail its activities, which would likely reduce the company's value and incur additional costs.

On the other hand, from WBD's board of directors' perspective, PSKY's plan is not a classic takeover at all, but a so-called leveraged buyout. This is a debt-financed takeover that would have to be paid off solely from the cash flow of the acquired company. PSKY, with a market capitalization of around $14 billion, is simply far too small.

Largest Leveraged Buyout in History

PSKY is therefore offering almost seven times its value. This would make it the largest leveraged buyout in financial history. PSKY is missing about $50 billion.

Where it would get this mountain of money from is unclear, especially since PSKY suffers from negative free cash flow and has very poor creditworthiness (“junk rating”). In the long time until the takeover is completed, a lot can happen -- on WBD's side, on PSKY's side, and on the side of potential financiers.

Although PSKY also offers a $5.8 billion termination fee, it is actually only worth $1.1 billion. If WBD accepts the PSKY offer, it must pay Netflix a penalty of $2.8 billion. In addition, there are likely to be an additional $350 million in interest and probably $1.5 billion in losses from financial transactions that cannot be carried out under PSKY's conditions.

Conversely, Netflix is financially potent, with around $1 billion in free cash flow per month and a theoretical market capitalization of $400 billion. This makes its offer significantly more attractive, even if the promised cash proceeds for WBD owners are not quite as high. The decision rests with the shareholders.

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