Depending on which side you ask, Hollywood is thriving or in crisis.
If you ask Paramount, they’ll tell you that tech and entertainment giants like Netflix, Amazon and Google have the industry cornered, so the only way to truly compete is through consolidation. In her opinion, the union of the two old studios is not only the strongest card yet to be played, but also the only step that will increase competition for the benefit of consumers and workers.
But if you ask the coalition of 12 states that sued to block Paramount’s takeover of Warner Bros. Discovery’s $111 billion business is “booming,” they claim in the lawsuit, at least for movie theaters. The crux of the lawsuit to stop the deal revolves around the idea that the merger would undermine the recovering theatrical landscape.
The contrast is one of several differences between Paramount and state prosecutors in a case that will define Hollywood for years to come. Expect a lot of legal jokes.
The first salvo of these maneuvers was the filing of the lawsuit on Monday. The court will now consider issuing a temporary restraining order preventing Paramount from closing for 14 days, followed by a preliminary injunction pending the outcome of the case.
For a court to make such a ruling, it must conclude that the states are likely to prevail in the case. The projected 30 percent share of the blockbuster market that the combined company would have hardly meets the presumption of antitrust violation set forth in the Supreme Court’s decision in United States v. National Bank of Philadelphia. Under the framework laid out in this case, Paramount would have to prove that the merger would not undermine competition.
The studio’s legal team, led by veteran litigator Makan Delrahim and antitrust superstar Jeffrey Kessler, is well aware of the decision and is prepared to appeal the adverse injunction. In a post on LinkedIn, Delrahim said he “bet” there are “at least 7 votes on the Supreme Court, maybe 8 or 9, that will overturn the decision today.” To bolster its ranks, Paramount brought in former U.S. Solicitor General Paul Clement, who has appeared before judges more than 100 times, more than any lawyer currently practicing in the country.
For the relevant market, states have decided not to involve streaming. It’s a smart move considering that Paramount+ and HBO Max account for no more than 10 percent of VOD viewership, according to Nielsen estimates from last year. It also sidesteps the potential defense that the studio is competing with the likes of YouTube or TikTok, an argument Netflix made when it looked to acquire Warners.
Doomsday scenario for the states over the next couple of months: They lose the injunction bid and Paramount pulls the plug on the deal. Historically, courts have been much more willing to block a merger outright than to dissolve it, not to mention the practical realities of separating two companies when they begin to combine personnel and operations.
The studio pulled back from its planned July 22 date, but aims to do so by the end of the quarter. Paramount has been preparing to finalize the deal for months. The company filed paperwork with the Justice Department in December to give its blessing to the deal, even though Netflix appeared to come out on top in the bidding war.
Delayed closure has serious financial consequences. Under the agreement, Warners shareholders will owe approximately $650 million per quarter, or $6.9 million per day, if the merger does not go through by Sept. 30.
The ticket fee is already a battleground. Paramount cites the payment as a reason why the merger should not be stopped, arguing that a delay would cause it irreparable harm. He’ll likely be looking for bonds in the nine-figure range.
States have opposing points of view. It said Paramount and Warners agreed the merger would not need to be completed until June 2027 if legal issues arose, meaning they accepted the risk of paying the fee. Historically, courts have been cagey about issuing large bonds in merger cases. The judge overseeing the Nexstar-Tegna merger ruled on a price of $10,000 after the TV giant demanded $150 million. That will be the first issue before U.S. District Judge Araceli Martinez-Holguin, who is already overseeing separate lawsuits from Paramount+ subscribers and the Writers Guild of America seeking to block the deal. All things will go in different directions.
The states’ lawsuit was initially assigned to U.S. District Judge P. Casey Pitts, a Biden appointee, but Paramount decided to remove him from the case due to “the appearance of bias” regarding his previous work at the WGA. A judge’s decision in a case involving software company Hewlett Packard Enterprise’s bid to buy information technology firm Juniper Networks for $14 billion may have played a role in that calculation.
All signs point to Paramount trying to turn the merger into a political football. Bonta estimated the cost of the litigation, which requires expensive lawyers, specialized economists and antitrust experts, at $20 million. This is the cost of doing business for government attorneys when they don’t have the Justice Department on their side.
And on Sunday, a day before the lawsuit was filed, a report emerged that Paramount CEO David Ellison’s camp was pushing the media executive to pull the studio out of California. According to Semaphore’s story, his confidants separately advised him to shift much of the studio’s $30 billion in planned production costs out of state, where filming levels had fallen to near historic lows.
There is at least some truth to this gambit. In a July 2 letter to Ellison, Tennessee Lt. Gov. Stuart McWhorter called on Paramount’s CEO to move the studio’s corporate headquarters amid disagreements with California. Hollywood Reporter found out. He emphasized “predictable management” and the state’s “strong belief that government should be a partner in the growth of the private sector.”
Ellison’s longtime adviser said so. TPP that “everything is on the table.”
Apparently, Paramount extended the so-called olive branch leading to the filing of a lawsuit. He offered to commit to producing 30 films per year with a 45-day theatrical window, but the offer was ultimately rejected.
The card Paramount could play: renegotiate the terms of its merger agreement with Warners, which wants the deal to go through in the same way as the Ellison-led company. If the merger falls apart, the company’s shares would likely fall back to the low or single digits where it has traded for most of the last five years. The growing specter of regulatory issues could also stifle any new proposal for the studio. Moving the termination date while raising the reverse termination fee, as happened after the Federal Trade Commission sued to block Microsoft’s bid to acquire Activision Blizzard, could make sense.
“It’s hard to imagine they wouldn’t renegotiate the deal in one way or another to keep it alive because it’s important to both parties,” says dealmaker David Sands, who advised ICM on its sale to CAA. “We’ve all seen what happens when these things fall apart. You get a significant reduction in value.”
Immediately after the lawsuit was announced, Warners shares rose about three percent on the news, perhaps an indication that the situation was not as bad as it might have been in the eyes of arbitrage traders. Some pointed out that there were no complaints about the collaboration between CNN and CBS News. Others talk about the lack of monopsony claims, which aim for a dynamic in which one buyer dominates, allowing it to purchase labor at market value. The Writers Guild of America ultimately laid out that theory when it filed its own lawsuit Tuesday. All eyes are now on SAG-AFTRA and IATSE, who may join the cause or pursue their own.
A total of four lawsuits were filed challenging the deal. The latest entrant is a Paramount shareholder who has accused Ellison and his father, Oracle magnate Larry Ellison, of cutting an illegal deal with President Trump to approve the merger. The deal is under attack on several fronts from various groups with different legal theories. A settlement of the states’ lawsuit may not be the end of the story.
However, settling the states case would be ideal given the time constraints, although Bonta is driving a hard bargain on terms. Bonta said Wednesday on KQED that a potential deal would have to involve splitting up a movie studio, a suite of cable channels or a news channel. So far, he has resisted proposals for behavioral remedies because they are “difficult to enforce” and “easily repealed.”
Despite all this, Paramount maintains that the other side will emerge victorious. For them, the only question is how long it will take.
“We will reach a happy agreement with them,” Kessler said Tuesday in an appearance on CNBC. – One way or another.