Depending on which side you ask, Hollywood is booming, or it’s in a state of crisis.
If you ask Paramount, it’ll say that tech and entertainment giants like Netflix, Amazon and Google have cornered the industry such that the only way to truly compete is through consolidation. By its thinking, a marriage of two legacy studios is not only the strongest card left to play but the only one — a move that will boost competition to the benefit of consumers and workers.
But if you ask the coalition of 12 states that sued to block Paramount’s $111 billion takeover of Warner Bros. Discovery, business is “thriving,” their word in the lawsuit, at least for theaters. The core of its lawsuit to stop the deal revolves around the idea that the merger will undermine a rebounding theatrical landscape.
The contrast is one of several distinctions between Paramount and state prosecutors in a case that will define Hollywood for years to come. Expect a lot of legal jockeying.
The opening salvo of that maneuvering came with the filing of Monday’s lawsuit. Now, the court will consider issuing a temporary restraining order stopping Paramount from closing for 14 days and, later, a preliminary injunction that would last until the case is decided.
For the court to hand down such an order, it’d have to find that the states are likely to win the lawsuit. The alleged 30 percent market share the combined company would have for blockbuster films just barely meets the presumption of a violation of antitrust law outlined in the Supreme Court’s decision in U.S. v. Philadelphia National Bank. Under the framework outlined in that case, it would fall on Paramount to prove that the merger wouldn’t undermine competition.
The studio’s legal team, led by savvy legal operator Makan Delrahim and antitrust superstar Jeffrey Kessler, are well-aware of the decision and are prepared to appeal an adverse injunction ruling. In a LinkedIn post, Delrahim said he “would bet” there’s “at least 7 votes, maybe 8 or 9, at the Supreme Court who would overturn it today.” Shoring up its ranks, Paramount has brought on former U.S. Solicitor General Paul Clement, who has well over 100 appearances before the justices — the most of any lawyer currently practicing in the country.
On the relevant market front, the states decided not to bring streaming into the case. It’s a smart play considering Paramount+ and HBO Max have at most an estimated 10 percent of VOD viewership, according to Nielsen estimates from last year. It also bypasses a potential defense that the studio competes with the likes of YouTube or TikTok, an argument that Netflix advanced when it was positioned to acquire Warners.
A doomsday scenario for the states over the next couple months: They lose their bid for an injunction and Paramount closes the transaction. Courts have historically been much more open to outright blocking a merger than unwinding one, not to mention the practical realities of decoupling two companies once they start to combine staff and operations.
The studio has abandoned the July 22 target date but fully intends to do so by the end of the quarter. Paramount has been setting up a sprint to consummating the deal for months. It filed the paperwork for the Justice Department to bless the deal in December, even as Netflix appeared to come out on top of the bidding war.
There are major financial repercussions for a delay in closing. Under the agreement, Warners shareholders are owed roughly $650 million per quarter or $6.9 million per day if the merger isn’t done by Sept. 30.
The ticking fee is already a battleground. Paramount cites the payment as a reason the merger shouldn’t be stopped, arguing it would be irreparably harmed by a delay. It’s likely to seek a bond in the nine-figure range.
The states have a clashing view. It says that Paramount and Warners agreed that the merger didn’t need to close until June 2027 if there was an ongoing legal challenge, meaning that they accepted the risk of paying the fee. Historically, courts have side-eyed issuing massive bonds in merger cases. The judge overseeing the Nexstar-Tegna merger issued one for $10,000 after the TV giant asked for $150 million. That’ll be the first issue before U.S. District Judge Araceli Martínez-Olguín, who’s already overseeing separate lawsuits from Paramount+ subscribers and the Writers Guild of America looking to block the deal. The cases will all proceed on different tracks.
The states’ lawsuit was initially assigned to U.S. District Judge P. Casey Pitts, a Biden appointee, but Paramount moved to recuse him from the case over “an appearance of partiality” relating to his prior work for the WGA. The judge’s handling of a matter over software company Hewlett Packard Enterprise’s bid to buy information technology firm Juniper Networks for $14 billion may have played a role in that calculus.
All signs point to Paramount trying to turn the merger into a political football. Bonta pegged the cost of litigation, which requires pricey lawyers and specialized economists and antitrust experts, at $20 million. That’s the cost of doing business for state prosecutors when they don’t have the Justice Department on their side.
And on Sunday, a day before the lawsuit was filed, a report surfaced of Paramount CEO David Ellison’s camp pushing the media executive to move the studio out of California. Per the Semafor story, his confidantes have separately been advising him to reallocate much of the studio’s $30 billion planned production spend outside the state, where filming levels have dropped to near historic lows.
There’s at least some truth to the gambit. In a letter to Ellison on July 2, Tennessee Deputy Governor Stuart McWhorter urged the Paramount CEO to relocate the studio’s corporate headquarters amid the rift with California, The Hollywood Reporter learned. He stressed “predictable governance” and the state’s “steadfast belief that government should be a partner in private-sector growth.”
A longtime adviser to Ellison told THR that “everything is on the table.”
By all appearances, Paramount had been extending what it perceived as olive branches leading up to the filing of the lawsuit. It had proposed committing to produce 30 films per year with a 45-day theatrical window, an offer that was ultimately rejected.
A card Paramount could play: Renegotiate the terms of the merger agreement with Warners, which needs the deal to go through just as much as the Ellison-led company. If the merger were to fall apart, its stock would likely crater back to the low teens or single digits, where it was trading for much of the past five years. The heightened specter of a regulatory challenge would also depress any new offer for the studio. Pushing back the termination date while hiking up the reverse breakup fee, like what happened after the FTC sued to block Microsoft’s bid to acquire Activision Blizzard, could make sense.
“It’s hard to see them not recut the deal in some way or form to keep it alive because of its importance to both sides,” says dealmaker David Sands, who advised ICM on its sale to CAA. “We’ve all seen what happens when these things fall apart. You’ll have significant value degradation.”
The immediate aftermath of the lawsuit’s announcement saw Warners stock rise roughly three percent on the news, perhaps an indicator that it wasn’t as bad as it could’ve been in the eyes of arbitrage traders. Some pointed to the absence of claims over the CNN and CBS News tie-up. Others to the absence of monopsony claims, which target a dynamic in which a single buyer dominates, allowing it to purchase labor under market value. The Writers Guild of America ended up outlining that theory when it filed its own lawsuit on Tuesday. All eyes are now on SAG-AFTRA and IATSE, both of which have vocally opposed the merger and could join the case or pursue one of their own.
In total, four lawsuits challenging the deal have been filed. The latest entrant is from a Paramount shareholder, who accused Ellison and his father, Oracle mogul Larry Ellison, of striking an illegal deal with President Trump for approval of the merger. The deal is being attacked on multiple fronts by different groups with distinct legal theories. An amicable resolution of the states’ lawsuit may not be the end of the story.
Still, a settlement of the states’ case would be ideal considering the time crunch, though Bonta is driving a tough bargain on terms. On KQED on Wednesday, Bonta said a potential deal would have to include separating a film studio, suite of cable channels or a news channel. Thus far, he’s resisted offers for behavioral remedies because they’re “tough to enforce” and “easily revoked.”
Through this all, Paramount maintains it’ll come out the other side as the winner. To them, the only question is how long it’ll take.
“We’ll reach a happy agreement with them,” Kessler said on a Tuesday CNBC appearance. “One way or the other.”
