Paramount Risks Costly Penalties as Lawsuit Stalls WBD Merger

A lawsuit from 12 state attorneys general led by California has Paramount’s acquisition of Warner Bros. Discovery officially stuck, to use show biz parlance, in “development hell.”

The merger is now on hold as the two sides prepare for a full-blown antitrust trial, though when it will occur is an open question; Paramount is pushing for a November trial, according to a Wall Street Journal report last week, while the states are arguing for it to start early next year. For Paramount father-son overlords Larry and David Ellison, time is now money, and central to the trial will be the residual effect of something from the analog past: cable TV.

Of Paramount Importance

Everyone involved has the date June 4, 2027, circled on their calendars. If the deal is not complete by then, according to a Puck report last week, WBD CEO David Zaslav can contractually call it off and collect a $7 billion termination fee from Paramount (Zaslav, we can imagine, regularly checks an already-ticking countdown clock). Even if the deal is eventually finalized, Paramount will still owe WBD a $650 million “ticking fee” per unconsummated quarter if the transaction isn’t completed by Sept. 30.

To avoid handing over the $7 billion check, Paramount will have to successfully disprove the states’ central argument: that the merger will give the combined company undue control over the cable and pay-TV landscape:

• After the merger, Paramount would have control of a sector-leading 27% of all cable affiliate fee revenue, the states have claimed. That’s enough, they argue, to give the company undue power when negotiating with cable companies and pay-TV distributors.
• Paramount’s legal brass is already arguing in the court of public opinion that the cable market is shrinking and thus largely irrelevant in a world dominated by streaming and social media.

Pass or Fail: Whether the “failing market” argument will carry weight is uncertain; a Guggenheim analyst wrote last week that there is some legal precedent for the claim. Still, cable may have finally reached its bottom. Charter said during its earnings call last month that it lost only 1% of cable subscribers in the past year. Cable-like service YouTube TV continues to grow and is on track to soon be the largest pay-TV player in the game.