Paramount WBD tender offer: Arguments for and against

Hours before Warner Bros. Discovery agreed to sell its studio and streaming assets to Netflix, Ted Sarandos, the co-CEO of Netflix, called WBD CEO David Zaslav to inform him Netflix wouldn’t be bidding any higher.

WBD shareholders now have a chance to call Sarandos’ bluff.

WBD shareholders have until Jan. 21 to tender their shares to Paramount for $30 in cash, though that deadline may be artificial. Paramount can extend it all the way to WBD’s annual meeting, which hasn’t been set yet but this year took place June 2.

If Paramount acquires 51% of outstanding WBD shares, it would control the company, even though the WBD board already agreed to sell the company’s studio and streaming assets to Netflix. Both Netflix and Paramount can use the coming days and weeks to speak with WBD shareholders to gauge whether they’d like to take Paramount’s offer or stick with the board’s recommendation to sell to Netflix.

To tender or not to tender, that is the question. There are sound arguments for both sides. The decision also presents a game theory element for shareholders who may simply want a bidding war rather than caring about the right buyer.

There are two overarching reasons why a shareholder might tender their holdings to Paramount.

The first is if the investor believes Paramount’s $30-per-share, all-cash offer for the entirety of WBD is more valuable than Netflix’s $27.75-per-share bid for just the Warner Bros. film studio and HBO Max streaming business. The second is a belief that tendering shares is the best way to force a bidding war between Netflix and Paramount.

A shareholder could decide Paramount’s current offer is better than Netflix’s if they think it has a higher likelihood of regulatory approval or if they believe Discovery Global — the portfolio of linear cable networks including CNN, TNT, Discovery, HGTV and TBS that’s set to be spun out — will have minimal value as a publicly traded company.

Paramount Skydance CEO David Ellison told CNBC earlier this month he values Discovery Global at $1 per share, given his prediction on the likely multiple (two times earnings before interest, taxes, depreciation and amortization) at which it will trade based on current valuations for similar linear cable networks. If WBD doesn’t agree to sell the entire company to Paramount, it plans to split Discovery Global out as its own publicly traded entity in mid-2026.

Paramount’s argument is that $30 per share is already greater than Netflix’s $27.75-per-share offer plus $1 per share for Discovery Global.

Paramount’s bid is also all cash, while Netflix’s bid includes 16% equity with a so-called collar, which means shareholders won’t know exactly how much Netflix stock they’ll actually receive until the deal closes.

As for regulatory approval, Paramount has played up arguments that a combined Netflix and HBO Max streaming business would be anticompetitive. Netflix has more than 300 million global paying customers. The idea of the largest streamer buying HBO Max has already raised concerns with politicians, including President Donald Trump, who said there may be a “market share” issue with a Netflix deal.

While Paramount would combine Paramount+ with HBO Max, Paramount+ has about 80 million subscribers, presenting less of a risk to competition.

The second, more nuanced argument to tender is to maximize upside even if the assets ultimately go to Netflix.

Ellison has already made it known Paramount’s $30-per-share offer isn’t best and final. Tendering could cause Netflix to come back with a higher offer, which may then prompt Paramount to raise its bid as well.

GAMCO Investors chairman and CEO Mario Gabelli told CNBC earlier this month “the notion of Company A and Company B having a bidding war — that’s what we like as part of the free market system.”

He added last week that while he was previously leaning toward tendering his shares to Paramount, “the most important part is to keep it in play.”

Other shareholders may believe, in contrast, that not tendering is the best way of jumpstarting a bidding war. If Paramount sees that it’s not getting traction with shareholders as the annual meeting gets closer, it may raise its bid to get more shareholders on board.

There are additional reasons not to tender. Shareholders may want the Netflix and Discovery Global equity portion of the Netflix proposal.

In a WBD filing last week, the company said a mystery “Company C” proposed to acquire Discovery Global and its 20% stake in WBD’s streaming and…