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In rejecting hostile takeover bid, Warner questions Ellison family trust and commitment to a $77.9 billion deal

Warner Bros. Discovery WBD -2.39%decrease; red down pointing triangle sent a message to Larry Ellison: If you want to buy our company, sign on the dotted line yourself.

Warner urged its shareholders Wednesday morning to reject Paramount Skydance’s PSKY -5.42%decrease; red down pointing triangle hostile takeover bid, saying the Ellison family-led bid was inadequate on multiple levels compared with that of rival Netflix NFLX 0.23%increase; green up pointing triangle.

Warner said it had lingering concerns about the financing, including the use of an Ellison family trust to backstop the deal. The company wants Larry Ellison to give a stronger personal guarantee that he, not an opaque trust, is fully committed to the $77.9 billion bid.

Ellison, the billionaire founder of Oracle ORCL -5.40%decrease; red down pointing triangle, is among the world’s richest men, even briefly holding the title of the richest this year. Yet his son David Ellison is fighting over Warner just as Oracle’s shares are under pressure over concerns about its bets on the artificial-intelligence boom. The stock fell 5% on Wednesday on reports of a potential financial partner spurning a data center Oracle was building.

Paramount’s $77.9 billion bid is already a higher price for Warner than Netflix’s $72 billion offer. But Warner says it isn’t that simple. Netflix is buying only Warner’s studio and HBO Max streaming businesses. Warner shareholders would continue to own a spinoff housing Warner’s cable networks including CNN and TNT.

Warner is saying it can’t know if Paramount’s all-cash bid will close unless the Ellisons disclose more about the trust or sign a deeper commitment.

Paramount isn’t likely to raise its bid immediately, if at all, people familiar with the matter said. Instead, it is engaging with shareholders and, with the help of its proxy advisers, gathering feedback to its tender offer about what it needs to do. That offer is currently set to expire on Jan. 8, though it could be delayed further.

David Ellison said Wednesday that he has been encouraged by the feedback received from Warner shareholders thus far and would continue to push forward.

Meanwhile, Paramount is continuing to make its pitch in Washington. On Tuesday evening, David Ellison and Paramount’s chief legal officer, Makan Delrahim, were at a dinner with White House representatives and lawmakers including Sen. Ted Cruz (R., Texas), chairman of the Senate Commerce Committee.

Mark Boidman, head of the Media & Entertainment Group at the investment bank Solomon Partners, said he doesn’t expect the showdown to conclude soon.

“We expect this roller coaster has many twists and turns and the winner will reshape the media landscape as we know it by integrating some of the most iconic studio and streaming assets,” he said.

The revocable trust

In a lengthy filing published Wednesday about Paramount’s and Netflix’s quests to get a deal, Warner detailed all the reasons it deemed the Netflix bid superior. At the crux of its decision is a belief that the Ellisons wouldn’t be good for their money.

Paramount’s bid rests on $40.7 billion in equity commitments and $54 billion of debt commitments from Bank of America, Citigroup and Apollo.

Within that, the Ellison family has pledged $11.8 billion, alongside $24 billion from three Middle East sovereign-wealth funds, and additional financing from Paramount stakeholder RedBird Capital Partners. (Jared Kushner’s firm Affinity Partners had been in the mix for less than $1 billion, people familiar with the matter said. But he withdrew from the process earlier this week, a move that isn’t expected to disrupt the wider group, the people added.)

The Ellison family has vowed to backstop the whole $40.7 billion equity commitment, crucial to winning over the Warner board and shareholders that the deal would close.

The filings show that both Ellisons were deeply involved in the process. In late September, after Warner rejected Paramount’s first proposal to buy the company, David Ellison phoned Warner CEO David Zaslav to request that he meet with his father. They all later had a videoconference meeting. Larry subsequently appeared in numerous other meetings, according to Warner’s filing.

On Wednesday, Warner said the Ellisons’ equity is supported by “an unknown and opaque revocable trust,” also citing “gaps, loopholes and limitations” in the documents Paramount has so far provided.

A revocable trust is simply an agreement, holding assets of the person who set it up for the benefit of whomever they designate, typically themselves, while they are alive. Usually when the creator (grantor) dies, the trust becomes irrevocable and holds the assets for the listed beneficiaries.

Paramount said in response that Warner is misleading its own shareholders, denying that this is a “complicated question about legal documents.”

“In reality, it is all quite simple: $30 in cash fully backstopped by a well-capitalized trust (in existence for approximately 40 years) of one of the most well-known founders and entrepreneurs in the world, Larry Ellison,” Paramount said.

Paramount said the Ellison family trust contains over $250 billion of assets—which is more than six times the equity funding commitment—including roughly 1.16 billion Oracle shares and “tens of billions of dollars in other assets.” It added that the trust has been a counterparty in other already-completed deals, including for Twitter.

Jay Adkisson, a creditor-rights lawyer, said only someone with access to the documents could determine whether the trust and asset pledge offered a firm enough equity backing in the deal.

The focus on the Ellison family wealth comes during a tough stretch for Oracle.

In September, Larry Ellison briefly surpassed Elon Musk as the world’s wealthiest person when Oracle’s shares rode a high from news that it had $455 billion in incoming revenue, largely due to a $300 billion contract with OpenAI.

Oracle’s shares have plummeted more than 40% since then, cutting Ellison’s wealth by more than $170 billion, according to an analysis of his Oracle stake by Dow Jones Market Data. Oracle’s market capitalization has lost more than $400 billion.

Investors have grown nervous about the amount of debt Oracle is taking on to build out data centers primarily for OpenAI, and about the software giant’s reliance on a startup that is burning through cash and isn’t expected to be profitable until around 2030.

Larry Ellison’s net worth is now around $243 billion, dropping him to fifth overall in Bloomberg’s billionaires index. He has a chunk of some $62 billion in shares pledged as collateral to secure “certain personal indebtedness,” according to a September filing.

Warner shareholders seem still to have mixed feelings. Money manager Mario Gabelli, a Warner shareholder, has said he is likely going to tender his shares into the Paramount deal, believing that it will be easier for them to get the deal done versus Netflix.

Another big Warner shareholder told The Wall Street Journal he is frustrated with Paramount’s response on Wednesday, saying that the company still hasn’t addressed Warner’s concerns in full and is making it harder for investors, including himself, to fight on the Ellisons’ behalf.