The Paramount-proposed sale of Warner Bros Discovery was to be a pivotal moment in Hollywood.
Rather, the approximately $110 billion transaction is a litmus test of what regulators will allow in an effort to check the entertainment industry’s consolidation trend.
Paramount Skydance is now seeking damages from the 12 states that are suing to block the merger, with the idea of trying to settle the case instead of waiting for the long court battle of an antitrust trial. The states, spearheaded by California, say the merger of two large media giants would lead to less competition, and consumers, workers, and the rest of the entertainment industry could ultimately suffer.
The stakes are high, to say the least. Paramount has already been approved by numerous regulatory bodies, including the U.S. Department of Justice. However, the state lawsuit is a huge hurdle to closing the deal.
Why Paramount Wants a Settlement
Paramount’s David Ellison is spending more and more time.
If the merger doesn’t close by the deadline, Paramount will pay a “ticking fee” of $0.25 per share a day to the Warner Bros. shareholders under the terms of the deal. Paramount has estimated that if the delay continues, they could end up losing billions of dollars.
That means that Paramount has an odd reason to look for a solution.
The company has been seeking to negotiate with the states and has pushed for the law to be put to rest before it can drag on for years.
Paramount has also gone the extra mile with the argument. Earlier this month, the company sought a federal judge’s order that the states and the Writers Guild of America, which is bringing its own lawsuit challenging the deal, post a $1.88 billion bond to ensure that it will not suffer financial losses from the delay in the merger.
But California Attorney General Rob Bonta has objected, claiming the merger was negotiated on the financial terms and should not be voided due to a lawsuit.
Why 12 States Are Fighting the Deal
This opposition is not only about Hollywood politics.
California and 11 other states say the merger of Paramount and Warner Bros. Discovery would harm competition in the key areas of the entertainment industry, especially in the basic cable and theatrical distribution segments.
The states sought to overturn the federal approval of the transaction, which was an unusual division between federal and state governments. After a lengthy investigation, the Justice Department determined the deal would be unlikely to negatively impact competition or American consumers.
The states disagree.
They say that a merged Paramount-Warner Bros. would have more leverage in distributing movies, television programming, and licensing, which means it could be able to control prices or availability.
That is more than just a business deal.
It’s a discussion on the level of consolidation that the entertainment industry can take before consumers feel the pinch. The Paramount-Warner Bros. battle comes at a time when businesses across the U.S. are facing greater scrutiny from regulators, from corporate mergers to new rules governing major companies, as seen in NYC’s changing regulatory environment.
A $110 Billion Bet On Hollywood’s Future
Paramount’s involvement in Warner Bros. Discovery is a sign of a much larger shift in media.
Traditional studios and television networks are no longer facing competition just from each other. They are going head-to-head with Netflix, Amazon, YouTube and a slew of other tech firms that have revolutionized entertainment viewing.
Paramount has been saying that size is essential to be competitive in this marketplace.
Behind Warner Bros. Discovery are a ton of assets: Warner Bros. Pictures, HBO and a big library of film and tv content.
For Paramount, that would form a much bigger entertainment firm that could go head-to-head in streaming and film production/content distribution.
But the regulators are asking another question:
Is it necessary to grow so large as to diminish in-market competition in order to be strong enough to compete internationally?
The nub of the lawsuit is this.
Hollywood Workers Are Watching Closely
The planned merger also has raised some concerns among Hollywood employees.
The Writers Guild of America has also voiced its opposition, saying that the deal might have a “shrinking effect” on the writers’ opportunities and bargaining strength.
Others have adopted a more complex stance.
A few unions and theatre groups who originally threatened to fight the deal have been shifting their focus more and more towards negotiating a settlement. The Directors Guild of America, for instance, and IATSE have sought for binding pledges on Hollywood production and theatrical releases.
Cinema United (which advocates for approximately 30,000 screens) recently asked Paramount and California to reach a solution that would protect theaters and consumers. Other major movie theaters, such as AMC, Cinemark and Regal, have also indicated a willingness to discuss settlement.
This change is notable.
Some industry players are now not so focused on whether or not the merger should proceed but instead on what will occur in the event that the uncertainty in the law continues for several months, it suggests.
Paramount Has More Than The Merger At Stake
Paramount’s connection to California is also in question because of the battle.
If the battle goes on, it is reported that Paramount is considering relocating its headquarters and some of its business out of California. States that have been considered are Texas, Tennessee and Georgia.
It would be a stunning breakthrough for a company that’s been so closely involved with Hollywood.
For decades Paramount has been a staple of the industry in Los Angeles. The consequences of a big firm’s move would go beyond the merger.
Meanwhile, Paramount also has a fiduciary duty to its stockholders. If executives feel that the regulatory environment in California is imposing undue costs or uncertainty, they should think about.
What a Settlement might look like.
It doesn’t necessarily resolve a issue with regulators permitting the merger to go through without any restrictions.
The states might request obligations to address their concerns.
Those might include movie distribution, job numbers, production numbers, movie releases, or a portion of the companies’ business.
Groups in the industry are already making their own proposals. Some unions have demanded pledges to keep Hollywood in the business and to keep a certain amount of theatrical film production going, while theater operators are seeking guarantees for the availability of films and distribution royalties.
Whether Paramount is prepared to give up as much to complete the deal will be up to them.
States will have to decide on whether the pledges would be robust enough to ensure competition.
The clock is ticking!
As the controversy grows, so do the economic issues.
The delay is causing “profound financial losses,” says Paramount. If the transaction doesn’t get resolved at some point in the future, the company estimates that it will cost billions of dollars in ticking fees.
The legal process is also progressing, and a trial is now anticipated in 2027.
This is because both parties stand to benefit from reaching an agreement prior to the court proceeding getting messy and costly.
However, there are risks associated with settlement negotiations, too.
If Paramount is too tough on the restrictions, then the financial justification for the $110 billion acquisition could become more tenuous.
If the states ask for too much, then Paramount may determine that it’s better not to deal with them, since it would otherwise have to settle for terms that would reduce the value of Warner Bros. Discovery.
The Bigger Business Story
The Paramount-Warner Bros. battle isn’t just being waged between two Hollywood studios.
It is about how traditional media companies can live in a streaming technology and consumer behavior-driven industry.
Paramount thinks size can be its answer to compete.
The states feel that eventually, scale can be a problem when it leaves consumers with less choice.
There is an economic basis for both arguments.
That’s why the results may have ramifications far beyond Hollywood.
Both sides will hope the agreement is an example of the kind of negotiation that will take place in an increasingly concentrated media market between regulators and companies when they negotiate large-scale media mergers.
Its failure may lead to an important precedent in future entertainment deals in an antitrust trial.
For the time being, Paramount is willing to take the chance that a negotiation will work out.
The firm has overcome most of the hurdles that have been in its path so far. The last hurdle, though, might be the most important: Getting approval from 12 states that a team of Paramount and Warner Bros. can be greater — but not too great.
That could be the deciding factor in a $110 billion deal that could mean Hollywood’s next media giant or that it’s biggest deal will sink under regulation. The deal also highlights how legal challenges facing major businesses can reshape corporate strategy, particularly when companies face opposition from government authorities.
