Paramount's Ellison used deep pockets, political links to buy Warner Bros

The dramatic turnaround positions Paramount to acquire Warner Bros in a $110 billion deal, making the Ellison family owners of one of the world's largest entertainment empires

By Lucas Shaw, Michelle F. Davis, Josh Sisco and Jeff Mason

 

After the board of Warner Bros. Discovery Inc. concluded a meeting on Thursday afternoon, Chief Executive Officer David Zaslav called David Ellison and Ted Sarandos to let them know the results. The board had deemed Ellison and Paramount Skydance Corp.’s latest bid superior to that of Netflix Inc. and Sarandos. 

Ellison’s advisers were steeling for at least four more days of hard work. Netflix had the right to match the offer under the terms of its deal with Warner Bros., and Paramount was ready to go several rounds against the streamer. But a couple of hours later, Sarandos called Zaslav back to inform him that Netflix was out. Warner Bros. and Paramount were stunned. Netflix had outbid Paramount in the first round of negotiations, and Sarandos, the company’s co-CEO, had spent the past week defending the deal in public. 

 

Warner Bros. and Paramount announced they’d entered into a definitive merger agreement on Friday.  

The dramatic turnaround has positioned Paramount to acquire Warner Bros. in a $110 billion transaction that would make the Ellison family owners of one of the largest entertainment empires in the increasingly global industry. The combined company would own two major Hollywood studios, HBO, CBS and a couple of dozen cable networks. This account is based on conversations with a dozen or so people involved in the deal. 

 

The transaction is the culmination of a months-long campaign by Ellison to win over Warner Bros. shareholders, regulators and the White House. Ellison and his team lobbied politicians to oppose Netflix’s deal and warned Hollywood about its potential consequences.

 

Ellison’s dogged pursuit speaks to the uncertain — some detractors would say desperate — state of Paramount, which derives all of its profit from TV networks that attract smaller audiences every year and owns a streaming service that is a fraction of the size of larger competitors. The newly combined company will spend years slashing costs to pay down a mountain of debt and is still likely to face a tough regulatory review. 

 

But for Ellison, a 43-year-old cinephile just getting his feet wet as a Hollywood mogul, it was a deal he had to have. Adding one of Hollywood’s great studios and a premium streaming service to his portfolio “could finally transform two subscale media companies into a more serious industry player,” according to research firm MoffettNathanson.

A botched first attempt

Despite having just spent almost two full years pursuing Paramount, Ellison at first underestimated what it would require to buy Warner Bros. He initially made a series of offers that the company’s board rejected as insufficient, opening the door for rival bidders. Even as Comcast Corp. and Netflix entered the fray, Paramount remained confident. It was the only suitor willing to buy all of Warner Bros.

 

When Warner Bros. rejected Paramount’s bid and announced a deal with Netflix on Dec. 5, Ellison and his team were incredulous. They wasted no time mounting a counteroffensive.

 

On Dec. 8, Paramount announced a tender offer to buy shares directly from shareholders and held a conference call in which Ellison explained why he believed the Paramount deal was better. Ellison then attended a summit hosted by UBS Group AG in New York, hunting for any shareholders who would listen to his pitch.

 

“We want to bring our proposal directly to WBD shareholders to evaluate a clearly superior proposal across both economic value and regulatory certainty,” Ellison said on a conference call that morning. “And we believe they deserve that choice.” Ellison then retreated from the spotlight, allowing Gerry Cardinale, one of his main investors, to serve as his vocal surrogate. Cardinale critiqued the Netflix deal, intimating that the Warner Bros. board was biased against Paramount.

 

Behind the scenes, Paramount worked to address some of Warner Bros.’ concerns. The board was worried that Paramount was taking money from the Middle East and China, as well as limiting its ability to operate while waiting for the deal to close. Warner Bros. was especially worried that Paramount would pull out or change the terms at the last second. Paramount was borrowing tens of billions of dollars — more than twice the company’s market capitalisation. It was only in the game because of Ellison’s father, who had yet to fully backstop the deal.

 

Paramount went on to make additional offers that addressed some, but not all, of the concerns, including price. 

Ellison plays the political game

While Ellison’s financial advisers worked on deal points, he and his legal team zigzagged around the world to rally support. They pushed the theory that Netflix’s deal was both anticompetitive and part of a broader strategy to monopolise the streaming market. They flooded the zone with statements that Netflix and Warner Bros. viewed as misleading and at times incorrect, but that the media, consumers and politicians were quick to amplify. People close to Warner Bros. quipped that Paramount’s army of public relations consultants must be getting paid by the press release. By contrast, Netflix, with a signed deal in hand, took a more measured public stance. 

 

Ellison travelled to Washington several times, meeting with President Trump, dining with Trump’s adviser Stephen Miller and answering questions from senators. Ellison’s outreach was bolstered by his father’s years of political donations. He also visited Europe, talking to French leader Emmanuel Macron, the UK culture secretary and the owners of local theatres. Just last week, Ellison and his chief legal officer, Makan Delrahim, visited the San Francisco Bay Area to meet with Democratic attorneys general.

 

Paramount also sought a review from the US Justice Department under an expedited timeline for tender offers. By rushing through that process and completing it in under three months, Paramount was able to pitch a quicker alternative to Warner Bros., which might have been bogged down with the Netflix review well into 2027.

 

Netflix and Warner Bros. dismissed all this activity as noise that distracted from an unassailable truth. They had a deal and Paramount didn’t. But Paramount’s efforts succeeded at igniting bipartisan concern about Netflix. The Senate Judiciary Committee held a hearing to probe how the acquisition would impact jobs in the US, competition in Hollywood and the health of movie theaters. Republican attorneys general called for the DOJ to sue to block the deal. Movie theater owners, documentary makers and unions objected as well. 

At the same time, a growing chorus of Warner Bros. shareholders began to agitate for the entertainment giant to engage with Paramount. They were concerned that Netflix’s deal would face a long regulatory review. They also liked that Paramount was offering to buy the entire company, while Netflix’s arrangement would require Warner Bros. to spin off its TV networks into a separate company.

 

Pentwater Capital Management, the seventh-largest Warner Bros. shareholder, sent a letter to the company saying its board had erred in not engaging with Paramount on a revised bid.

 

After Paramount made yet another overture — its ninth, which included a promise to raise its offer and concessions on key terms — Warner Bros.’ board felt it could no longer ignore them and asked Netflix for permission to engage. 

 

Warner Bros. expected that Netflix would preemptively amend its own deal to box out Paramount, according to people familiar with the events. Instead, Netflix allowed the talks to occur. Having seen Paramount stumble in previous negotiations, Sarandos dared Paramount and the Ellisons to “put their money where their mouth is.” Warner Bros. felt it was time for Paramount to put up or shut up after months of promising to raise its offer, the people said. 

 

That moment proved to be a turning point. Rather than saying Paramount’s offer was superior to Netflix’s, Warner Bros. outlined what Paramount would need to do in order to win — setting up the negotiations on its terms.

Netflix backs down

As Paramount and Warner Bros. prepared to resume negotiations, executives on both sides were pessimistic. The two camps had held weeks of unproductive discussions last year in which Paramount missed deadlines and threatened Warner Bros. After five days of negotiations — and with only 48 hours left in the negotiation window — Paramount had yet to submit a new offer. The two sides had done little more than exchange a few documents, and the topic of financing had barely been broached. Some advising Warner Bros. worried they’d wake up later in the week to see a statement from Paramount accusing them again of neglecting to have a constructive dialogue.

 

Yet Paramount was prepared to take advantage of its final opportunity. Ellison called Zaslav Saturday night and informed him that Paramount was going to address all of the company’s remaining concerns. Paramount sent the final offer and documents over late Saturday night. The two sides sprinted for the next two days to try to iron out an agreement, only hanging up mid-conversation at midnight on Monday because they were legally obligated to do so.

 

By Tuesday, Warner Bros. had determined that the deal could create a path to a superior offer, allowing them to keep talking and to iron out the final terms. Afterwards, even Paramount was surprised by how quickly a deal came together.

 

While Paramount and Warner Bros. were haggling out their differences, Sarandos went on a press offensive, making the case for his acquisition across a series of interviews. “This deal offers great value to the WBD shareholders,” Sarandos told Bloomberg TV. “It offers great long-term value to Netflix. We have a normal regulatory path ahead.”

 

Few in Washington or Hollywood rallied to Netflix’s defence. For months, Netflix’s shareholders had been indicating their opposition to the deal. Shares in the company had dropped more than 30% since Netflix began its pursuit, erasing more than $100 billion from the streamer’s market capitalisation. Even so, Netflix remained committed to fighting for the deal.

 

Netflix’s commitment to the deal wavered after Paramount substantially improved its offer over the weekend. Netflix realised that Paramount was not going to back down, and there were whispers that the company was willing to go several rounds in a bidding war to clinch the deal. Netflix made the decision early in the week that it would bow out once Warner Bros. officially called the offer superior, according to people familiar with the matter. By mid-week, Warner Bros. began to sense that Netflix might not increase its bid.

 

Sarandos returned to Washington on Thursday, meeting with the DOJ, US Attorney General Pam Bondi and others. During an earlier visit, President Donald Trump had cautioned Sarandos not to overpay for the company. Sarandos spoke to the president again on Thursday and told him: “I took your advice,” according to a person familiar with the conversation. 

 

Sarandos came away encouraged that the deal would’ve gotten a greenlight, according to people familiar with the talks, but had already decided to concede. That evening, Netflix notified Warner Bros. that it wouldn’t be increasing its offer and announced the news about an hour later. Shares in Netflix spiked as shareholders celebrated the retreat. Netflix got a $2.8 billion breakup fee, while sidestepping potentially years of distracting legal fighting and thorny integrations of new businesses.

 

Still, Paramount is not in the clear. The European Commission is reviewing the Warner Bros. sale, as are a number of state attorneys general, including in California. “Paramount/Warner Bros is not a done deal,” California Attorney General Rob Bonta said in a statement. “These two Hollywood titans have not cleared regulatory scrutiny – The California Department of Justice has an open investigation, and we intend to be vigorous in our review.”

 

If some US states do challenge the deal it could trigger a situation similar to the merger of Sprint and T-Mobile from 2020. In that case the DOJ negotiated a settlement, while a group of states led by New York and California challenged the deal in court, though they ultimately lost. Heading the DOJ at the time was Delrahim, Ellison’s current adviser.

 

DOJ antitrust lawyers have continued to ask about the competitive impact of the deal, according to people familiar with the matter. A DOJ spokesperson declined to comment.

 

It took Ellison a year to get Shari Redstone to sell him Paramount and another year to convince the Trump administration to let him do the deal. He just came from behind to win a bitter, protracted public fight with one of the most powerful companies on the planet. Now, assuming he can secure regulatory approval, Ellison will have to make good on the promises he’s made to increase production and release 30 movies a year in theatres. For all his efforts to date, he’s still facing the biggest challenge of his career — turning around two struggling Hollywood giants as new technology undermines the foundation of their business.