WBD's Board Rejection: Why Ellison's $40B Guarantee Didn't Change the Math

The immediate catalyst is a boardroom verdict. On Wednesday, the Warner Bros. Discovery board delivered its unanimous recommendation: reject Paramount Skydance's amended $108.4 billion hostile bid. This isn't a new stance; it's a tactical reinforcement of a position the board has held since the Netflix deal was announced. The core rationale is now framed as a stark choice between certainty and risk. The board points to its signed merger agreement with Netflix as offering a "compelling value, a clear path to closing and protections for our shareholders." In contrast, it labels Paramount's offer as "inferior."

The board's letter to shareholders crystallizes the risk assessment. It frames Paramount's proposal as a risky, debt-heavy leveraged buyout. The board highlights that the offer continues to provide insufficient value, citing an "extraordinary amount of debt financing that create risks to close." This directly targets the amended offer, which guaranteed the backing of billionaire Larry Ellison but stopped short of upping the price. The board's message is that even with Ellison's commitment, the structure remains flawed and carries unacceptable uncertainty.

The central investment question is whether this board assessment is sound. The catalyst sets up a clear tension: a board with a binding deal versus a bidder with a powerful guarantor but a lower price. The board's focus on the Netflix agreement's protections and the specific costs of abandoning it-like the $2.8 billion termination fee-shifts the debate from pure valuation to transactional safety. For shareholders, the board's rejection is a vote for a known path over a potentially more expensive, but uncertain, alternative.

Deconstructing the Risk: LBO Structure vs. Asset Sale

The board's rejection hinges on a fundamental clash of financial structures. Paramount's revised offer is a classic leveraged buyout (LBO), while Netflix's is a straightforward asset sale. This difference creates a stark divergence in execution risk.

Paramount's plan is a massive debt-fueled acquisition. The board details that its financing would leave the newly merged entity with an estimated $87 billion in debt, making it the largest LBO in history. The structure is heavily reliant on securing that debt. The board's key concern is that this creates a "heightened risk of failure to close." The proposed deal includes a $5.8 billion termination fee if Paramount fails, but the board argues that the financial strain would be borne by WBD shareholders if the deal collapses. The risk is amplified by the fact that Paramount itself has a junk-rated credit rating, and its equity financing is backed by a $40 billion personal guarantee from Larry Ellison. While Ellison's commitment provides a layer of security, it does not eliminate the core LBO vulnerability: the deal's success is contingent on a complex, high-stakes financing package that is prone to market shifts and lender pullbacks.

In contrast, Netflix's proposal is a cash-and-stock transaction with a far lower execution hurdle. Netflix has a $400 billion market value and an investment-grade credit rating. Its $27.75 per share offer is simpler and more predictable. The financial risk for WBD shareholders is defined by the breakup fee. If the Netflix deal fails, WBD would owe Netflix $5.8 billion. But if shareholders reject the Netflix deal, WBD faces a $2.8 billion reverse termination fee to Netflix. The board frames this as a clear, known cost, not the open-ended financial peril of an LBO.

The bottom line is one of certainty versus complexity. The LBO structure, with its towering debt load and reliance on a single, high-profile guarantor, introduces multiple points of potential failure. The board sees this as a material risk that outweighs the lower price. Netflix's asset sale, while involving a larger total value, presents a cleaner, more certain path. For the board, the risk of a failed LBO-potentially leaving WBD with a damaged balance sheet and a costly lawsuit-was simply too high compared to the defined costs of the Netflix deal.

Valuation and Shareholder Impact

The immediate value on the table is clear. Netflix's offer is $27.75 per share, a mix of cash and stock. Paramount's revised bid is $30 per share, all cash. On paper, Paramount's price is higher. But the board's argument is that for shareholders, the path to realizing that value matters more than the headline number.

The board frames the Netflix deal as offering a "clear path to closing" with defined costs. The primary risk is a $5.8 billion termination fee if Netflix fails. In contrast, the board argues that Paramount's LBO structure introduces far greater uncertainty. Even with Larry Ellison's $40 billion personal guarantee, the deal's success hinges on securing a staggering $87 billion in debt financing. The board warns that many large LBOs see acquirors or their financing sources seek to terminate deals or renegotiate terms, creating open-ended risk for WBD shareholders.

This risk assessment is what the market is pricing in. WBD's stock has surged 122.7% over the past 120 days, trading near its 52-week high of $30. That rally reflects a powerful bet on the Netflix deal's certainty. The stock price is effectively valuing the Netflix transaction's protections and lower execution risk as worth more than the extra $2.25 per share Paramount is offering. In other words, the market is saying the cost of the Netflix deal's breakup fee is a known, manageable price for the security of a cash-and-stock transaction.

The bottom line for shareholders is a trade-off between a higher, riskier price and a lower, safer one. The board's rejection of Paramount's offer, backed by the market's recent performance, suggests that the current setup favors the Netflix deal. The stock's run-up shows investors are willing to pay a premium for the certainty of closing, even if it means accepting a lower per-share value.

Catalysts and Watchpoints

The board's thesis now faces its first real test: the shareholder vote. The Netflix deal is expected to close after the previously announced separation of WBD's Global Networks division, Discovery Global, into a new publicly-traded company, which is now expected to be completed in Q3 2026. This separation is a key condition. The vote will confirm whether shareholders agree with the board's risk calculus. A clean approval would validate the push for certainty. A rejection, however, would signal deep investor skepticism about the Netflix deal's value or execution, potentially opening the door for Paramount to re-engage.

Regulatory scrutiny is the next major watchpoint. The deal creates a global mega power in broadcast entertainment, a phrase that signals the antitrust authorities' likely focus. Both the Netflix and Paramount bids will face intense scrutiny. The regulator's stance will be a critical determinant of the deal's path. A clean regulatory approval would remove a major overhang. Any significant proposed divestitures or conditions could delay the closing or even threaten the transaction, directly challenging the board's promise of a "clear path to closing."

The market will also be watching for any further moves from Paramount. The board's rejection was based on the LBO structure and the $87 billion debt load. If Paramount attempts to amend its offer again-perhaps by lowering the price to match Netflix's per-share value but adding more equity or a different financing structure-it will test the board's risk assessment. The market's reaction to any such move will be telling. A strong stock pop on a new Paramount proposal could indicate that investors see a better risk/reward than the board does. A muted response would reinforce the board's position.

Finally, the financial stakes of walking away are concrete. If WBD rejects the Netflix deal, it would incur $4.7 billion in costs, including the $2.8 billion breakup fee to Netflix, additional interest on debt, and a $1.5 billion fee for failing to complete a debt exchange. This is a material sum that would pressure the balance sheet. The board's argument is that accepting Paramount's offer carries even greater financial risk. The coming months will show whether that calculus holds.