Paramount Beat Netflix for WBD, but the Regulatory Fight Isn’t Over

After five and a half months and 10 bids, Paramount CEO David Ellison won the war for Warner Bros. Discovery. His next challenge will be to get his $110 billion acquisition past regulators and the forces that seek to derail the deal, which are considerable.

In addition to getting sign-off from the Department of Justice, Ellison will need to convince overseas regulators including the European Commission and the U.K. Competition and Markets Authority. A regulatory review of Paramount-WBD will investigate how the concentration of two major movie studios, the No. 4 and 5 largest streaming services and a vast portfolio of linear TV networks will impact competition and jobs in Hollywood and overseas.

California Attorney General Rob Bonta also said he’s “in conversation” with his AG colleagues about a combined Paramount-WBD. He warned that the merger is “not a done deal” and that he would be “vigorous” in the state’s review of the transaction. Meanwhile, some members of Congress have called for a national security review by the Committee on Foreign Investment in the United States (CFIUS), citing concerns over the involvement of three Middle Eastern sovereign wealth funds – from Saudi Arabia, Qatar and the United Arab Emirates – in Paramount’s financing structure.

Those hurdles — amplified by a horde of theater owners, labor unions, nonprofits and other affiliated entertainment businesses already voicing their opposition — means Paramount’s road to getting its deal greenlit won’t be as smooth or quick as some may believe.

“There will be multiple layers of state and country regulatory reviews around the world due to sports and entertainment genre concerns, in addition to constituents pushing back against various types of synergies,” Seaport Research analyst David Joyce said, adding that closure delays could be expected.

While acknowledging the potential antitrust concerns raised by a Paramount-WBD combination, experts told TheWrap they expect the deal to ultimately get approval from the DOJ, given Ellison’s strong relationship with the White House. They also believe CFIUS and international regulators would be more likely to impose conditions rather than outright block a merger. And while they didn’t rule out a lawsuit from state attorneys general, they argued support from the DOJ and any concessions Paramount-WBD may offer could weaken a legal challenge.

“Certainly there will be political opposition from various stakeholders in the entertainment ecosystem,” New Street Research analyst and former FCC chief of staff Blair Levin told TheWrap. “But whether those forces can assemble a critical mass remains to be seen.”

One secret weapon who has been a key player in the hostile bidding war has been Paramount Skydance’s Chief Legal Officer Makan Delrahim, hired to join the senior team about a year ago. Delrahim was previously a top official in the Department of Justice Antitrust Division in the first Donald Trump administration and has close ties to the current administration. He has been vocal about the legal hurdles that faced the Netflix deal, and is able to communicate directly with the administration about what Paramount now faces.

“We will work incredibly collaboratively with regulators to ensure that we get a quick path to closing and are confident in our ability to achieve that goal,” Paramount CEO David Ellison told analysts on Monday.

A Paramount-WBD combination will be a force to be reckoned with on multiple fronts. Together, the two companies accounted for 13.7% of TV viewing in January – above YouTube’s 12.5%, Disney’s 11.9% and Netflix’s 8.8% for the month, per Nielsen’s latest media distributor gauge.

Paramount and Warner Bros. will own a combined film library of more than 15,000 titles and thousands of hours of television programming, including franchises such as “Harry Potter,” “Mission Impossible,” “Lord of the Rings,” “Game of Thrones,” the DC Universe, “Teenage Mutant Ninja Turtles,” “Transformers,” “Star Trek” and “SpongeBob SquarePants.” The company has committed to producing a minimum of 30 films per year for theaters, 15 from each studio.

They’ll also have dozens of cable and free-to-air networks in over 200 countries and territories – including CBS, CNN, HBO, TNT, MTV, Comedy Central, Discovery Channel and much more – and control rights to the NFL, Olympics, UFC, PGA Tour, NHL, Big Ten and Big 12 football, NCAA college basketball and Champions League.

Most importantly, Paramount-WBD will have wider reach in streaming with Paramount+, HBO Max and Pluto TV. Paramount+ has 79 million streaming subscribers as of its latest quarter, while Warner Bros. Discovery’s streaming division, which also includes Discovery+, touted nearly 132 million subscribers globally and will exceed 150 million by year end. Despite still falling short of Netflix, the combined entity would become a serious streaming competitor to Disney and Amazon’s Prime Video.

Paramount expects to squeeze over $6 billion in cost savings from the combined entity. While executives insist that will come from areas like technology and real estate, media mergers have a long track record of hurting Hollywood’s workforce in the name of “synergies” – a key concern that state AGs and international regulators will be scrutinizing closely.

On Monday, Ellison noted there are “no statutory impediments” to close the deal in the U.S. after the Hart-Scott-Rodino waiting period in the Department of Justice’s review expired on Feb. 19. Despite the expiration, the DOJ can still investigate or challenge a Paramount-WBD deal now that a formal deal has been reached.

TD Cowen analyst Paul Gallant highlighted several potential antitrust risks from a combo, from upward pressure on pay TV prices to enhanced bargaining leverage with TV/movie workers and  increasing pricing on or withholding of WBD content licensed to distribution rivals.

“We don’t anticipate Paramount will face any regulatory difficulties,” Morningstar Research analyst Matt Dolgin said. “In the U.S., we believe Paramount has a good enough relationship with the presidential administration to ease concerns, and the Department of Justice has set a precedent in overlooking the merger of major studios when Disney bought Fox.”

While acknowledging the combined entity would have “significant sports rights and children’s’ programming,” Joyce said that issues around streaming concentration will be less impactful than under a Netflix deal given that Paramount+ had been subscale. And Dolgin said even with their substantial number of linear TV networks, the overlap shouldn’t stop a deal.

“Cable networks are on their way to extinction, in our view, under any scenario,” Dolgin said. “Streaming platforms can and, to some extent, already have displaced the function that most cable networks once provided.”

On Monday, Ellison said that the combination “does not come close to hitting any of the metrics that would be problematic” and that there’s been no concern expressed by regulators about the two companies combined sports rights portfolio.

There’s also a chance that CFIUS could get involved over national security concerns around three Middle Eastern sovereign wealth funds’ involvement in Paramount’s financing.

In previous bids, Paramount noted it had received $24 billion in financing from Saudi Arabia’s Public Investment Fund, the Qatar Investment Authority and Abu Dhabi’s L’imad Holding Company. On Friday, Paramount said that its $31 per share offer includes $47 billion in equity financing from the Ellison family and RedBird Capital Partners, though that “may include other strategic and financial partners” at closing. It also includes $54 billion of debt commitments from Bank of America, Citigroup, and Apollo.

A mandatory CFIUS review would be triggered if a foreign entity obtains a 25% or more voting interest in a U.S. company and a foreign government holds a 49% or greater voting interest in that foreign investor — a level Paramount has said that the Middle Eastern funds don’t reach. But that would not stop Warner Bros. Discovery from submitting a voluntary filing , as its been urged to do, or CFIUS from initiating a “non-notified” review of the deal.

In addition to voting interests and ownership stakes, experts previously told TheWrap that CFIUS reviews can look at practical influence, access to non-public strategic information and leverage through special veto or board observer rights. The regulator has discretion to ask questions, recommend mitigation or block the deal if it sees national security risk.  An individual familiar with the matter previously told TheWrap that the Middle East funds have no governance, special information rights or “anything of that nature.”

“Saudi/Middle Eastern Funding was already a sticking point in the bidding war itself. The nonvoting, non-board structure Paramount agreed to was a smart concession and will be the central argument for clearing CFIUS, but regulators will probe whether that structure truly insulates against foreign influence,” regulatory attorney Braden Perry told TheWrap. “Outright blockage is unlikely, but a National Security Agreement requiring additional firewalls and ongoing government monitoring is a probable outcome.”

In addition to federal and international regulators, California AG Bonta could threaten the deal. He has warned that market consolidation could lead to “increased unaffordability, a loss of good-paying job opportunities, and fewer choices for consumers,” and said he is taking a “very close look” and is “committed to fighting market consolidation that we find unlawful.”

Gallant expects that Bonta will lead the charge on a legal challenge by state attorneys general. But experts noted that if the DOJ shows its support for the merger, a judge could end up clearing the way for a Paramount-WBD combination, just like the courts did when state AGs challenged the Sprint/T-Mobile merger  in 2019.

While Levin pointed out that the case against a Paramount-WBD deal is “far stronger” than the failed case the Trump administration brought against the AT&T/Time Warner merger, both he and Gallant see a deal ultimately winning approval — especially if Paramount and Warner make strategic concessions to weaken a state AG case, such as divestitures or other long-term commitments to offset the power and reach a combined company would have. Trump has notably called for CNN to be sold to new management in a potential deal.

“If the DOJ does in fact support the deal, we think that would persuade a judge to approve the merger over states’ objections, Gallant said.

Representatives for the DOJ and CFIUS did not immediately return TheWrap’s request for comment.

When it comes to regulators overseas, a European Commission spokesperson told TheWrap it has not been “formally notified” of the Paramount-WBD deal, though the media giant said it has already begun pre-notification discussions. Meanwhile, a CMA spokesperson declined to speculate on cases it will or won’t look into outside of a formal investigation.

Ellison has already held meetings with European regulators and U.K. Secretary of Culture, Media and Sport Lisa Nandy and said that foreign investment authorities in Germany and Slovenia have given the transaction clearance to proceed. However, that clearance only addresses national security concerns and is one of more than a dozen foreign investment clearances needed. European regulators can also still investigate the deal for potential antitrust concerns.

“The CMA is the trickiest foreign regulator here given the recent precedent of blocking RedBird/IMI’s Telegraph bid on foreign ownership grounds. The EU will focus more on streaming concentration and likely requires behavioral remedies around content licensing,” Perry said. “Both are manageable but will add time.”

Running Point Capital Advisors partner and chief investment officer Michael Ashley Schulman previously told TheWrap that the EC and other international regulators care about whether a combined entity can “strong-arm the ecosystem of labor, distributors, advertisers, creators, or rivals,” but an outright block is less likely than a “long procedural grind plus remedies.”

Cristina Caffarra, an economist who worked on multiple competition investigations for M&A deals brought before the EC, expects overseas regulators to “make noise, look busy, [and] send a lot of information requests,” with a review that could last from as little as 25 days to around 90 days. But all that matters is which the White House leans, she said.

“No one in Europe will remotely do anything that can upset that,” Caffarra added. “So it would all be performative perfunctory.”

While Paramount will likely prevail in its fight, even Warner Bros. Discovery CEO David Zaslav acknowledged at an employee town hall that plenty could change between now and the targeted closing date of Sept. 30. If it takes longer than that, shareholders will get a 25 cent per share “ticking fee” — or approximately $650 million — each quarter until closing.

“A deal may not close,” Zaslav said. “If it doesn’t close, we get $7 billion and we get back to work.”

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