Paramount pays a $110 billion premium to sideline Netflix | Commercial Awareness Compass #73

Hello and welcome to the commercial awareness compass. You're a weekly guide to thinking like a commercial lawyer. Each episode weeks pour a key issue shaping the legal and business landscape, helping you to build the clarity and confidence to discuss it by breaking it down to three levels, beginner, intermediate and then advanced. This week we're revisiting a story that we covered a few months ago about Paramount and Netflix battling to purchase Warner Bros. So we're coming back to this story now and there have been a few developments and we're trying to see what's changed and come to the story from a new angle. I'm Sam, a law conversion student and a future trained solicitor and I'm here to stay with Henry who I'm sure many of you will be familiar with but for those who aren't we'd like to introduce yourself and tell us a bit about what you do. Yeah sure, hey everyone thanks for having me Sam. I'm Henry I am a non-pattern singular content creator and I talk about all things sort of workplace well-being. So it's really nice to be back to be talking about this story that as you kind of mentioned Sam we spoke about not too long ago and there's been quite substantial update which we're going to get into. Brilliant thank you and so yeah just you know if you could give us a bit of an introduction what was the original deal so that story we spoke about initially where Paramount and Netflix were both battling we had a bit we came to a sort of conclusion we thought Netflix would win out so could you sort of give an overview as to maybe why we thought that and what's happened since then what's the new state of the deal. Yeah so since we last spoke if you listen to this episode we touched on the story where Warner Brothers agreed to deal with Netflix and we kind of focused on what was one of the key parts of the deal that was made with Netflix around there being this quite chunky break clause so if Warner Brothers decided to pull out for whatever reason then they would be liable for an almost three three two point eight million or billion a lot of money and we thought well commercially if we would take it and hold it would seem silly for Netflix for Warner Brothers to walk away from this deal with Netflix even though they had this additional offer from Paramount to say actually we want to buy the whole business come with us so at the time the deal with Netflix looked like it was locked in and it was going to go ahead subject to all the usual sort of due diligence and regulatory approvals but lo and behold we were very much made to eat our words because Paramount came back and said "Ladon Able I do have Netflix now you've got like huge break clause and break fee well guess what we're going to do here's the figure we're going to offer you 110 billion US dollars and also that break clause don't you worry here's our card here's our money we're going to pay that for you so now Netflix have basically been pushed aside that deal with them is no longer happening in Paramount and Warner Brothers are now going to be almost certainly looking to negotiate and finalize a deal around Paramount basically buying all of Warner Brothers yeah so initially I think it was a 2.8 billion dollar sort of break fee and that seems like such an almost incomprehensible amount that Paramount are willing to just say we'll pay for that and move on but is there anything else that makes this deal so special so in the last time we discussed this we sort of spoke about how Netflix is deal was just for a part of the business how is Paramount's new offer different so you said it was 110 billion what is included in that 110 billion now yes so let me just pull it up to make sure that I am having a lot so you've got this exactly correct so yes what we have is the 110 billion which is what the dealers valued at so it looks like they're paying approximately 31 US dollars per share in cash which is quite significant premium over its historical trading prices we've also got the was it the 2.8 billion break fee which as we discussed before this it looks like Warner Brothers will be paying for that out of their own sort of pocket but we'll recoup that money through the overall 110 billion deal fee and they're also including a well they've strained them kind of it's financing position around that and ultimately has made the deal package look a lot more commercially valuable and attractive to Warner Brothers kind of reducing any sort of deal uncertainty and just to really strengthen the deal they've also included a 7 billion regulatory termination fee so say for example Warner Brothers finds that the deal is going to be blocked because of for whatever regulatory reasons it can't go ahead and let's say Warner Brothers lost out on what as we previously discussed like a commercially sound financially sound deal with Netflix and I guess even from a PR perspective being attached to Netflix with the kind of wait that it holds would be the worst thing in the world so what they've done is they've offered this 7 billion regulatory fee should the regulators block the merger and that ultimately shifts the regulatory risk on to paramount rather than it's sitting with Warner Brothers and it also kind of gives that because of the value of this deal it gives the shareholders this added reassurance that if the deal collapses we still get like X amount of money off the back of this yeah so I think that just want to stick with that 7 billion dollar regulatory termination fee so even though they appear to have so Warner Brothers have accepted this deal already and the handshake's done everyone knows what's going to be happening with this yes are there anything that could actually stop the deal as it is or is this entirely up to the regulators now and that 7 billion is just in case regulator stop it or is there any other factors that might prevent the deal as well yeah there could be a whole host of factors and when you're dealing with the other side the parties will obviously be doing their due diligence around this and if there's any kind of skeletons in the closet or whatever it may be that suddenly they're like all actually I don't want to go through with this or X Y Z but I think one of the biggest regular one of the biggest risks would be regulatory to say no but also we might have a risk around the shareholders of the business themselves saying do you know what all this money sounds incredible but actually we still get the hbgb's around us we're not completely comfortable with what's going ahead so actually we're not going to sign this off you don't have our shareholder consent cheers for your hard work but unfortunately this is a really deal that we feel from a commercial perspective makes sense and when you're talking about hundreds of billions of dollars you kind of have to be a bit let's chat with the lawyers what do we actually think about this this is a lot of money this could potentially like send a company under if you're spending that much you're not necessarily getting what you think you're going to get or there's something that actually you should have checked as part of the due diligence and you didn't get yeah so if it's awaiting shareholder approval typically in a deal like this size what's the sort of timeline for where shareholders would give their approval for something is that something that happened so now they've I guess the deal's been accepted when how long is it until the shareholders get to have their say I'll deal with the size it's going to take quite a long time in any event with the whole transaction process and the lawyers working on the deal getting all the regulatory approvals might take some time getting the financing in place to fund the deal might take some time so whilst we're signing a deal and agreeing to the terms it may not necessarily still guarantee that it's going to complete and in that process before kind of the ball gets rolling in its entirety the shareholders are going to need to sign it off so they'll be having discussions around that they'll be calling the relevant meetings and obviously we're talking about US companies here so whatever their company processes around sort of having the board meetings and having those shareholder meetings and getting the various resolutions filed and all of that stuff that in itself could take a while to so it's not going to be I think we may come back to this as we spoke about before recording for a part three further down the line just to see where a wrap because I'm sure the regulators sort of antitrust regulators in all of those guys will have something to say about this and it will definitely hit the news headlines yeah and so as we go into the intermediate I want to sort of stick with that idea about the regulators and so recently I think just a few days ago in the US some of these state tiny generals were calling in Warner Rose having this like a discussion about the deal and so in America there will obviously be regulatory concerns but in the UK there's also been an announcement that there may be a CMA investigation into this deal what sort of powers does the CMA in the UK have to look at a deal like this is happening in the US I think that because a lot of these streaming platforms do operate in the UK so they may be having a look around this they may be wanting to have a sort of impact or have an assessment of the impact what it's like to have on sort of UK broadcasting. Also we need to consider sort of monopolies and kind of is this unfair. And whilst they may not necessarily be able to say no, um, cancel the gear, they could have some kind of implications around it and sort of have some, have some cause for concern. And I think to be fair, quite rightly, because you've got these two huge entities. Now in a position that they could potentially like dominate an environment and make it harder. Um, we can have the EU in the sort of EU commission being involved as well. But I do think that if this deal is to go ahead, then ultimately I think, um, it will likely get the approval, or is that it needs. But I think there will be some assurances that perhaps will need to be provided, um, around this. I don't think it's going to be smooth sailing. But I do think there will be a lot of industry backlash, for example, from, um, maybe let's say smaller studios, let's say independent directors, actors, that they may kind of have something to say about this in, in the sense that, um, it's a huge deal and it's going to impact the industry and its entirety. It's kind of going to shift the whole narrative. And we may see, um, we saw this not too long ago actually with, uh, what are they called, uh, telecoms providers, where we were seeing a lot of them kind of merge because if they didn't merge, um, they would effectively go under, uh, and then there was a lot of regulatory concerns around that. And I think maybe this might trigger certain studios and streaming platforms to kind of merge again, because if we don't, or if they don't, they may not necessarily survive this kind of, um, new sort of way that we're kind of in right now with TV and film. Yeah, I think, um, one of those in Dubbs, one of the big five Hollywood, um, producers alongside Paramount. So we're already seeing their only five already with a consolidation of that may, like may have made, sorry, may have much bigger ripples across the whole industry if you're going down from five to four that's getting dangerly close to just having a duopoly or just two or three major, um, film productions. And so recently actually on that, there has been some pressure from actors and directors in Hollywood to try and block the deal. Do you think commercially that people on the ground could have much impact on the regulators and their approach to things? Or do you think that maybe regulators won't be so concerned with those groups and more concerned at the broader American commercial scene? I think that when you're, when we're kind of talking about studios of this size, the scope of the actors and actresses that will have been on projects that are run by these houses, they're like a list names, they're big names, they are people that have impact powering money. So I do think that we may see and we will likely see resistance from actors, from directors, from big Hollywood names, which could, in theory, damage relationships and reputations that the actors and their agents and that sort of group of people have with these studios, they may employ a couple of them, they may not want to work with them, it could harm future productions, if you want directors working with this big studio. And obviously the whole point of this deal is to kind of create and produce and have an up like a space when walking, be creating and shared. But ultimately they cannot exist without the talent. The talent is a core sort of commercial asset to these production houses, regardless of how big your life, you don't want your a list talent, or if your a list talent doesn't want to work with you, then actually, you don't really have much, you're just relying on a back catalog of content that you've already got. So yeah, I think for sure they can have a huge impact. It's a really interesting point you make there about almost how, rather than the consumers putting pressure, if Hollywood itself refuses to work with Warner Bros or Paramount after this, suddenly they have no business. They've bought this massive bank of IP and projects and past films from Warner Bros. But if they want to keep going and remain relevant, suddenly if the actors aren't working with them or they oppose the deal, that commercial history doesn't matter as much, they just can't build and go forward. Yeah, no, I completely agree. I guess there's going to be a balance of the actors and actresses around wanting work and wanting to work on these huge productions and studio outputs. But equally, there's still a pressure that actually maybe does not good for the Hollywood and its entirety. And we kind of have to think how powerful and persuasive a lot of the talent in Hollywood. And Hollywood itself is an environment. It is quite, I think, important from a commercial consideration when you're the lawyer sort of working on this. Then you kind of really need to know the intricacies of that kind of sector and how it actually operates because it's completely different. Yeah, so do you think that lawyers behind the scenes? Well, they be worried about these things. Will they be trying to maybe talk with the actors, guilds or the actors unions and try and discuss with them? All that be something that's out in the hands of lawyers and maybe something that another element of the team will do? I think the lawfuls will definitely be involved. It may be the various like organisations and bodies that represent actors and talent may be involved in sort of discussions with or their lawyers themselves, maybe kind of putting pressure on and getting involvement. In it, but 100% there will be discussions around this with the two like main parties and the lawyers just kind of around the potential commercial impacts of it. And if they're not, I think there's a very nice thing, but I'm very confident that they will be. I guess ultimately, money talks and as much as we can say that they might plan to boycott ultimately will all the talent be able to because there will be lots of actors who are struggling maybe older eight former A-list names who are looking to come back into it. And as much as we can say, well, they need the actors, will the actors be persuaded when they've got seven billion to throw just on the regulatory, the regulatory issues and concerns? Yeah, exactly. It's not that it sounds like they're not going to much money left, they're throwing it left right, but yeah, you're completely right. It was a certain talent, maybe able to boycott or put pressure on, you may have actors and actresses at the opposite end, they were like, well, actually, we need to work because of what TV and film is looking like at the moment. There's a whole shift in the landscape. We need that look, we need to do that project. We need that money ultimately and you'll completely write the at the end of the day, these people need a paycheck. So maybe the pressure from them may not be as substantial as it regulates it, but I think pressure will still exist. Yeah, I think we could go down a rabbit hole here of AI and how that's moving the industry in different directions, but I think let's stick to the. We can avoid that one for this discussion, just one, maybe one episode without talking about AI, it would be nice. So if we go to the towards the advanced section now, if we refocus back on the deal slightly behind the scenes, what all the lawyers for both sides be doing. So we talk a lot about due diligence, especially, let's say you take it from the perspective of Paramount who are buying Warner Brothers. What will the lawyers on their side be trying to look for in Warner Brothers before the final deal gets that shareholder approval and the all adopted lines assigned and it goes ahead. I think what we'll see is the lawyers will be obviously of course doing their due diligence, not be teams of people involved in that and they'll be looking at regulatory strategy, how we get this approved, what are the regulators that we need to comply with, what's the global impact of this? We need to work with our EU colleagues, our UK colleagues, just to make sure that actually all of the boxes that need to be ticked, to being ticked, will look at integration planning, how the two companies are actually going to operate. And then when we get that overlap period, then when we've been bought and merged, what does that look like? What the employees are going to do? How does that work? Obviously we have 2P here in the UK but in the US we'll be thinking about whatever their equivalent is. IP, the transfer of that, any sort of governance changes that need to be made in terms of we've now got currently two boards for the two organisations. What does that board look like? When we've just got one who's been charged? What does that structure look like? And I think we've had anti-trust and anti-competition, sorry risks around that. What does that look like? How do we mitigate those? And that's all just getting up to the dogey in sign. Then obviously once we've got the deal that's gone ahead, we're ending to look at all the post-completion stuff. And that's sorry, we're only coming back to sort of the integration or what it looks like, the PR, the marketing and what does sort of the roll-up around this look like as well. And if there are any issues, let's say six months after the merger, what do we do in those circumstances? Where does the risk sit? to whom does that risk sit with post completion? And then you all have all the admin things as well. We wanna get all of your filings and everything, locked in and sent away in readiness, post completion. - Yeah, so there seems to be quite a lot from Paramount site. You spoke there a bit about the board consolidation. - Yes. - With this being a purchase, does that mean that the boards could become together to one Paramount Warner Bros. combined board? Or would you typically in a deal with it? I mean, you won't know this specific, so this is a hack deal. Would you expect to see maybe Warner Bros. retain their executive structure just under the bigger umbrella of the Paramount sort of business? - I guess it depends on how they want to structure it in sort of what they want this deal to do. Often people may have a comment call it, they wanna buy it and consume it. So it just becomes one mega entity or if they still want to operate them as the two distinct sort of names. But I'm sure that I'll want, and again, we'll deal with the US system here in terms of corporate governance. But I think there's still wants and kind of unity across the board because ultimately it's going to exist as one. So what looks like in the future will probably get a better idea kind of as the deal progresses. But I think 100% that there are lots of involvement and some consistency. - Yeah, I guess you don't want the sort of ego's clashing as well if someone's been CEO or high-sea sweet ranking person in Warner Bros. It's only they don't want to be out of a job and like looking for work. That I guess that's a bad tone and the people who do remain might see that unvavorably. - Yeah, and just on that point, I read people being out of jobs. There's probably as it stands going to be a lot of duplication of roles. So that's going to be a huge task for employment colleagues to kind of navigate that. What does the, if we have to have it, what does the layout of a strategy look like? How much money are we going to throw it back? Because obviously if you're going to lay people off, there's a cost involved with terminating people, people's jobs no longer exist because they've been replaced. How do we deal with all of that as well? And that's going to be quite a big exercise, especially when you've got two entities that are that big. - Yeah, and suddenly Paramounts costs already in over 100 billion, are just working out with each individual part of this deal. I guess the next question is then from Warner Bros side, will they be doing anything specifically to prepare, do you think, are they maybe going to restructure or would they have any debts they'd need to disclose or try and settle before a deal would go ahead? - I think ultimately what they'll be wanting to do is kind of operating in a way that kind of keeps the business as valuable as it should be and preserve that business value until ultimately completes because they don't want to be doing things in operating outside of them, no more operation capacity. And suddenly there were a value of the business planets because Paramount would be like, "Well, that's, we're offering you a lot of money. Why have you just done X, Y, and Z in reduced or shall we value to next to nothing?" So they're going to want to be basically operating as normal business as usual. In the background, I'll be compliant with any relevant disclosure obligations, assist regulators and work too improactively to get this deal over the line. - Yeah, and so I think I've got one final question for you here, and I'll be sort of gone over the both sides of the deal, what they'll be doing and what it'll look like behind the scenes. And so currently we've got a zero for one record on being correct about how this deal is going to go. But if I could ask you again, do you think it's likely that this deal will pass with all we can see with the regulators that we've discussed with the problems with the guilds and maybe the actors and with how the internal operations go? Do you think that at this stage that this deal is likely to ultimately go over the line? - You know what, mate, I said last time that the broke clause and the fee and the impact of that was so sort of prominent in the way that Netflix was structuring how they were going to finance the deal as well was in such a way that it would be silly for them to commercially not do the deal, turns out I need very little around how one of brothers wants to operate and I got that wrong. So I think this looks a lot more promising in a sense of what's being offered and the risk to sorry, the fire alarm that I was going on. The risk to Warner Brothers is being mitigated by the break fee being covered and also we've got that regularly to protection fee as well. So I do think there is a lesser risk. I think one of my biggest concerns would be why is Paramount so willing to spend so much money to acquire this. Obviously commercially they think it makes sense. But they were clearly very, very committed to taking this deal from Netflix. So it would be interesting to kind of see what kind of comes out of that over the next few months. - Yeah, I guess as well there is that element of the prestige of Warner Bros. They've had so many, there's had such a history in Hollywood, they're one of the earliest production houses. I think they originally had things like Harry Potter. Yeah, they have such history and they've had such a story to filmography. I guess yeah, that is maybe a draws Paramount putting them but we as laypeople may see as silly numbers see amounts of money. - Yeah, well because we've got the reboot of Harry Potter coming out soon, don't we? So I'm not sure if I'm around with the idea in how that's it, is violent that's probably worth in itself quite a lot of money, the Harry Potter intellectual property. But yeah, I'll be interesting to see what comes with this. - Yeah, so I'm going to hold you to this then and hopefully in a few months when you see the deal has been done, we can come back and you get your, you get to redeem the loss from the first, the call. - Yeah, it's going to come to a point where we're going to have our own offer for it. (laughing) - Just to get a deal done. - Perfect, and thank you. So I think that nicely brings us to the end of this week's commercial earners' conference. I'll say a big thank you to you again, Harry, for joining us and a thank you to everyone for listening. And so remember being commercial where isn't just about falling the headlines, it's about understanding the questions they raise and how lawyers help to answer them. And we'll see you in the next episode to keep building your commercial earners. But until then, prepare without the panic.