Larry Ellison pledges $40 billion to boost Paramount's Warner Bros. bid

Paramount has been aggressively pursuing Warner Bros. for months, and Ellison was taken by surprise when the board agreed to a deal with Netflix for $82.7 billion for the streaming and studio assets. The strength of the financing for each bid has emerged as a decisive issue in the takeover battle, which unleashed two massive debt-fueled offers that rank among the largest in the past decade. Paramount took its offer of $30 a share, or $108.4 billion including debt, for the entire company directly to shareholders.

“In an effort to address Warner Bros.’s amorphous need for ‘flexibility’ in interim operations, Paramount’s revised proposed merger agreement offers further improved flexibility to Warner Bros. on debt refinancing transactions, representations and interim operating covenants,” Paramount said in a statement on Monday.

Personal Backing

Larry Ellison, 81, the chairman of Oracle Corp., agreed to provide an irrevocable personal guarantee of $40.4 billion in equity financing for the offer and any damages claims against Paramount, according to the statement. Ellison also agreed not to revoke the family trust and will keep its assets in place while the Warner Bros. transaction is pending. The company said it’s publishing records confirming that the Ellison family trust owns about 1.16 billion shares of Oracle common stock and that all material liabilities are publicly disclosed.

Paramount also offered to increase its regulatory reverse termination fee to $5.8 billion from $5 billion. Warner Bros. would have to pay $2.8 billion to Netflix if it backs out of its deal and goes with another suitor, according to terms of their agreement.

Warner Bros. shares were up 3.5% to $28.75 at the close in New York. Paramount rose 4.3% while Netflix dropped 1.2%.

Paramount’s offer “continues to be the superior option to maximize value for Warner Bros. shareholders,” David Ellison said in the statement. “Because of our commitment to investment and growth, our acquisition will be superior for all Warner Bros. stakeholders, as a catalyst for greater content production, greater theatrical output, and more consumer choice.”

Deal Prospects

Ellison’s personal guarantee gives Paramount a critical boost to its financing, some market participants say. Warner Bros.’ reason for opposing the bid “is dissipating fast,” said Louis Navellier, chief investment officer at Navellier & Associates. “To take a bid that’s less valuable because you question a trust is totally bogus,” he said. “The debt is not an issue because of the full faith and credit of Larry Ellison.”

That still might not be enough to persuade the Warner Bros. board, according to an initial analysis by Bloomberg Intelligence, which said the revised termination fee and financing costs still “leave the $30-a-share bid inferior to Netflix’s.”

The battle for Warner Bros., the century-old studio behind legendary films from Casablanca to Batman, is one of the biggest media deals in years and has the power to reshape the entertainment industry. David Ellison has argued that a merger with his company would preserve a more traditional Hollywood structure and keep some of Warner Bros.’ legacy intact. He has posited that his all-cash offer, backed by his family trust, is financially superior and claims that it would have an easier time of getting approved by regulators.

A combination with Netflix would marry two of the world’s biggest streaming providers with some 450 million subscribers and provide Netflix with a deep library of programming to help give it a leg up over challengers like Walt Disney Co. and Amazon.com Inc.

Bank Funding

The Paramount bid is backed by $54 billion of commitments from Bank of America Corp., Citigroup Inc. and Apollo Global Management Inc. as well as plans to raise $40.4 billion in equity. It’s been previously reported that figure includes $11.8 billion from the Ellison family, with additional financing from three Middle East sovereign wealth funds as well as RedBird Capital Partners. To get the funds, Paramount is pitching itself to credit markets as an aspiring investment-grade borrower entitled to cheaper interest rates and underwriting fees.

Paramount sits one notch below investment grade at S&P Global Ratings and barely above junk at Fitch Ratings. To win blue-chip status, it must execute a sweeping slate of cost cuts and efficiency gains. Complicating matters, Paramount’s debt package is being structured to leave the company, rather than its bankers, on the hook if interest rates for the longer-term financing climb during what could be a drawn-out takeover battle that stretches into 2026 or beyond.

Netflix, meanwhile, has lined up $59 billion of unsecured financing from Wells Fargo & Co., BNP Paribas SA and HSBC Holdings Plc for its own bid for part of Warner Bros. The streaming giant got a $5 billion revolving credit facility and two $10 billion delayed-draw term loans to refinance part of the bridge facility, according to a filing on Monday. That leaves $34 billion for syndication and its solid investment-grade ratings guarantee it cheaper borrowing costs in the primary bond market.

Risk Factors

In its letter to shareholders and a detailed 94-page regulatory filing last week, Warner Bros. hammered away at risks in the Paramount offer, including what the company described as the Ellison family’s failure to adequately backstop their equity commitment. The equity is supported by “an unknown and opaque revocable trust,” the board said. The documents Paramount provided “contain gaps, loopholes and limitations that put you, our shareholders, and our company at risk.”

The Warner Bros. board said Paramount hadn’t been straightforward with shareholders when it said its initial proposal had a “full backstop” by the Ellison family.

The board said if Paramount’s proposed deal were to close, it would carry a debt load nearly seven times larger than the combined company’s earnings before interest, taxes, depreciation and amortization. “Such debt levels reflect a risky capital structure that is vulnerable to even potentially small changes” in Paramount or Warner Bros.’ business between signing and closing, according to the letter.

Warner Bros. said it repeatedly raised concerns about insufficient evidence the Ellison family would backstop any deal. Netflix, by contrast, addressed each of the board’s concerns, the company said. David Ellison has criticized the bidding process, accusing Warner Bros. of unfairly favoring Netflix.

Paramount said it’s extending the expiration date of its tender offer to 5 p.m. New York time on Jan. 21. As of Dec. 19, some 397,252 shares had been tendered, Paramount said. Warner Bros. has more than 2.47 billion outstanding shares.