Paramount merger delay leaves WBD in limbo. Here’s what may come next

Warner Bros. Discovery is feeling whiplash.

It was only last summer that the company said it would split itself in two and began the process of creating separate, publicly traded entities: Warner Bros., which would have housed the streaming and film units, and Discovery Global, which would have run its global linear TV networks.

Change seemed to be happening at breakneck speed. The company was in the midst of an aggressive buildout for its HBO Max streaming platform, pushing into new markets and chasing subscriber and profitability growth. Its film studio was showing signs of much awaited momentum. CFO Gunnar Wiedenfels had begun strategizing with fellow executives on how to run a business of just TV networks in a period of rapid decline.

But after a sale process and a delayed merger with David Ellison’s Paramount Skydance, much of that change has ground to a halt.

WBD CEO David Zaslav said during an earnings call earlier this month that executives have “been trying to drive the value of the company” in order to have WBD in the best shape possible for when the merger would close.

That was after a group of states led by California Attorney General Rob Bonta filed to block the deal on antitrust grounds — and before preliminary settlement talks between the California AG and Paramount seemed to fall apart earlier this week.

The start-and-stop means Warner Bros. Discovery has fewer options on the table at a time when the media industry as a whole is charting new paths. The company — made up of the storied film studio, a portfolio of TV networks and a prestige streaming business — once looked agile. Now it’s forced into being cautious.

“This is as good a deal as Warner Bros. Discovery’s going to get, and they are going to have a difficult time totally walking away here with no more than a breakup fee,” said Tom Rogers, a media veteran who’s currently senior advisor to Versant Media Group and executive chairman of AI film and TV production company Fountain 0. “So I think they have plenty of incentive to also figure out how this deal could get done.”

The proposed $110 billion sale price should be a windfall for WBD, Zaslav included. Paramount has agreed to pay $31 per share to acquire WBD, and if regulatory approval is delayed beyond September, Paramount will start owing a “ticking fee,” raising the deal value.

The questions that remain are what will Paramount be buying if the deal goes through after an extended delay, and what happens to WBD if it doesn’t?

Interim operating covenants laid out in the merger agreement allow for WBD to run itself as an independent entity while the deal moves toward closing. That flexibility was a particular point of emphasis for Warner Bros. Discovery executives when it was negotiating a deal to sell itself — first with Netflix, then Paramount — according to a person familiar with the matter.

In situations where WBD would need Paramount’s blessing to do something while the transaction is pending, the agreement states those permissions can’t be “unreasonably withheld.”

The agreement accounted for a merger closing process that could take 12 months or more, giving WBD some cushion in the event of a delay.

While WBD is unable to take part in major M&A, it is still able to ink licensing deals and other types of agreements or partnerships with media peers. From a creative perspective there hasn’t been much holdup on that front, according to another person familiar with the matter. Film and TV content creators are still pitching themselves to WBD, said the person.

CNBC’s sources spoke on the condition of anonymity because they weren’t authorized to speak publicly.

Licensing out content to other platforms and networks has proven to be a lucrative business model for WBD, as well as its peers.

Since the merger between Warner Bros. and Discovery in 2022, the company has licensed out content from the highly coveted HBO library, like “Sex and the City,” “Insecure” and “Band of Brothers” to Netflix, and series like “Westworld” to free ad-supported streamers.

During the company’s August earnings call, CFO Wiedenfels touted “very healthy demand” for WBD content.

At the same time, media’s appetite has been growing for different streaming business models, such as bundling platforms for one subscription fee or ingesting content from one platform into another. NBCUniversal’s Peacock, for example, agreed to embed its content into YouTube Premium in a deal that many onlookers say could set a new precedent.

Leadership for both NBCUniversal and Fox Corp. have said their companies are open to future combinations or bundles with other platforms.

HBO Max is already offered as part of a bundle with Disney’s streaming services, and media reports have recently surfaced that Netflix is considering teaming up with some of its peers. WBD CEO Zaslav himself has long been an advocate for a bundling model, which stems from the pay TV world.

Yet with more streamers finding their dancing partners, it’s hard to imagine which, if any, companies would want to strike new agreements with HBO Max while its future remains up in the air.

Paramount’s Ellison has said upon completion of the WBD merger, Paramount+ and HBO Max would become a single service. The uncertainty of those streamers’ futures likely leaves them on the outs while other smaller players make new in-roads.

And if WBD were to strike such deals now, per the interim operating covenants they would be relatively short-lived regardless.

“It’s certainly not easy to run the WBD business with this overhang of not knowing the direction of where it’s headed and the constraints on what they can do that the merger agreement sets out. It makes life more difficult,” Rogers said.

Meanwhile, the longer WBD and Paramount wait to combine their streaming services, the more lead time competitors may have to outpace them individually.

“Currently, both Paramount Skydance and Warner Bros. Discovery own and operate subscale streaming services; combined, we believe they have a better chance competing with the bigger DTC players (namely Disney and Amazon, with Netflix and YouTube still in a league of their own),” MoffetNathanson analyst Robert Fishman said in an Aug. 5 note following Paramount’s earnings report.

“If the deal falls through, then both streamers are going to find themselves saddled with standalone platforms that are unlikely to be able to compete longer term,” Fishman said.

Earlier this month WBD’s earnings report showcased record-breaking revenue growth for its streaming segment, while linear TV and the film studios weighed on results.

However, that same momentum could soon slow. Much of HBO Max’s recent growth has taken place internationally, and this past quarter marked the end of its expansion into major international markets.

Smaller markets remain, but executives have been told not to expect streaming growth as significant as WBD has reported recently, said a third person familiar with the matter, who spoke on the condition of anonymity because they weren’t authorized to speak publicly.

WBD expects to hit its goal of surpassing 150 million global streaming subscribers by the end of this year, and says future growth will stem from its ad-supported tier and additions in various markets.

California’s Bonta told CNBC last week that settling the states’ antitrust case against Paramount would require “robust structural remedies” — particularly in the pay TV and film studios businesses.

While preliminary settlement discussions were quickly paused following media reports about potential stipulations, bankers and insiders have considered which assets could realistically be most appetizing if they were to hit the chopping block.

WBD subsidiary New Line Cinema is likely to attract bidders, CNBC reported on Tuesday. The nearly 60-year-old film and TV production company is behind films like the Lord of the Rings and Final Destination franchises and more recently the Mortal Kombat installments.

Some of WBD’s pay TV networks may also be attractive to would-be buyers if Paramount needs to shave the portfolio down, CNBC reported, including the Turner channels such as TNT and TBS, or even its lifestyle networks like HGTV.

Of course, the dark cloud hanging over all of this dealmaking — real or hypothetical — is the fresh threat that states could take up the regulatory mantle from federal regulators and challenge more deals on antitrust grounds.

— CNBC’s Julia Boorstin contributed to this article.