Warner Bros. Discovery formally rejects Paramount takeover offer (again)

The latest in the ongoing battle for control over Warner Bros. Discovery remains the same as it has been for the better part of a month. Warner’s board has formally rejected another takeover offer from Paramount and new owner David Ellison.

The move was widely expected after reports in late December that Warner planned to rebuff the latest bid, again claiming that its announced deal with Netflix is the superior offer for shareholders. Now that Paramount’s latest offer has been formally rejected, the ball is back in Ellison’s court to decide whether or not Paramount will up its bid yet again in the hopes of wrestling control of Warner away from Netflix.

And while several Warner shareholder expect that to happen, it’s increasingly unclear just how high Paramount and Ellison will have to go to get their desired outcome. Amid the myriad reasons Warner’s board rejected the latest offer was the argument that Paramount “intends to incur an extraordinary amount of incremental debt” with its various financing partners. Raising its bid would likely require even more financing from outside stakeholders, some of which are problematic Middle Eastern sovereign wealth funds. If Warner decided to exit its Netflix agreement, it’d owe the streamer a $2.8 billion breakup fee, posing another hurdle for Paramount.

The Warner board sees the Netflix deal as offering more certainty than Paramount’s offer, which it argues amounts to a leveraged buyout, where a company takes on significant debt in order to purchase another company.

Also at issue is the valuation of Warner’s “stub” company, Discovery Global, which will be spun out as part of the Netflix arrangement. Discovery Global will include Warner’s legacy cable assets, including brands like TNT Sports and CNN. Paramount, which is attempting to purchase the whole of Warner, including the Discovery Global assets, argues the value of the stub is several times lower than the share price the board and Netflix are projecting.

Paramount’s current bid is $2.25 higher per share than Netflix’s, meaning, at least on paper, if the market values Discovery Global at less than $2.25 per share, the Paramount offer is superior.

Of course, it’s impossible to know exactly how the market will value Discovery Global before it is spun off. And there is certainly a compelling argument to be made that, even if Netflix is offering less money than Paramount on paper, selling to Netflix is better for Warner shareholders long-term.

The question is, is there a number that Paramount can give Warner that the board simply cannot refuse? If so, the future of TNT Sports could very well end up combined with CBS Sports. If the Discovery Global spinoff moves forward, the entity could find itself a prime target for acquisition. Last month, Financial Times reported that hedge fund Standard General was interested in the asset. The media analysts at LightShed Partners recently predicted that a combined Nexstar/Tegna would be interested in Discovery Global, consolidating TNT Sports’ portfolio with The CW’s current lineup.

Whatever the case may be, the future of TNT Sports is directly tied to this acquisition, which appears far from being decided.