PARAMOUNT | WB TRANSACTION RECEIVES DOJ APPROVAL

Published: Jun 16, 2016

Approval Looks to Have Been the Easy Part. Delivering on the Promises Won’t Be.

David Ellison's pledge of 30 theatrical releases and a 45-day exclusive window is welcome news for exhibitors, but history suggests heavy debt loads have a way of reshaping even the best intentions.

Offering up my two cents regarding what looks to be a fait accompli…

With the U.S. Department of Justice now approving the Paramount Skydance acquisition of Warner Bros. Discovery without requiring any divestitures or behavioral remedies, the transaction appears to have cleared its most significant regulatory hurdle and is now on the path toward an expected closing later this year, assuming the remaining international approvals are obtained. Several state attorneys general have filed suit seeking to block the merger, but history suggests those challenges face a difficult road after DOJ approval and are more likely to delay than derail the transaction. The remaining wildcard is the European Union, where approval is generally viewed as likely, although conditions could still be imposed given the size of the transaction and the significant foreign sovereign investment backing the deal. While an outright rejection by the EU would create a serious complication and could require restructuring or litigation, most observers believe some form of approval remains the most probable outcome.

What I find particularly striking is that a media transaction of this magnitude was allowed to move forward without ANY required divestitures. That is highly unusual and reflects regulators' apparent view that the competitive landscape has fundamentally shifted, with traditional studios now competing against global technology and streaming platforms rather than simply one another. Wall Street has largely embraced the merger as creating a stronger competitor with meaningful scale and cost synergies, while many within the creative community and exhibition industry remain highly suspicious, concerned that further consolidation could ultimately reduce content output despite management's assurances. Consumer sentiment, meanwhile, has been relatively indifferent, with most audiences caring less about ownership structure than about whether the movies and streaming services they enjoy continue to be available.

David Ellison's commitment to release at least 30 theatrical films annually with a minimum 45-day exclusive theatrical window is unquestionably encouraging and represents one of the more exhibitor-friendly promises made during this entire process. That said, I remain skeptical. The combined company will emerge carrying a staggering $79B in net debt, making it THE most highly leveraged media company in history…and history has shown that financial pressures often have a way of overtaking even the best intentions. As integration costs mount and investors demand deleveraging, maintaining a robust theatrical slate and honoring a 45-day window may become increasingly difficult if shorter windows or direct-to-streaming alternatives appear to offer a quicker financial return.

At this point, the list of events that could still derail the merger from closing is relatively short: an unexpected adverse ruling from European regulators, a successful injunction from the state attorneys general, a financing disruption, or a material deterioration in either company's financial condition before closing. While none of those outcomes can be dismissed, the momentum now clearly favors completion of the transaction. In my view, the more important question is no longer whether the deal gets done, but whether the promises made to exhibitors during the approval process will still be intact three to five years from now once the debt has been reduced, the synergies have been realized, and the public commitments have faded from memory.