Time Isn’t on Paramount’s Side
For months, Paramount has barreled toward closing its $111 billion takeover of Warner Bros. Discovery by July. 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. So far, it’s secured greenlights from over a dozen countries.
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Those designs were stymied when a coalition of 12 states led by California sued to block the deal, likely putting an end to its planned closing date. The lawsuit pushes to the forefront the risk of Paramount being forced to pay a hefty fee to Warners shareholders for the delay.
Paramount’s frustrations with the timing of the lawsuit were on display during a hearing on Friday over whether the court should issue a temporary restraining order preventing the studio from consummating the transaction. U.S. District Judge Araceli Martínez-Olguín said she’d issue a decision by next Wednesday.
In what could be a signal that she’s inclined to grant the states’ emergency motion, the judge stressed at one point that Paramount conceded that it wouldn’t suffer any harm if the deal was frozen for a short period.
After a decision on the temporary restraining order is issued, a mini-trial will follow on whether the court should hand down a preliminary injunction preventing Paramount from integrating or commingling assets and operations with Warners until the case is decided. If granted, there will be major financial repercussions for the David Ellison-led company. Under the terms of the deal, Warners shareholders are owed roughly $650 million per quarter or $6.9 million per day if the deal isn’t done by Sept. 30.
For Paramount, the time-crunch is a key issue. It’s offered not to close the acquisition for up to a month if the court agrees to schedule preliminary injunction proceedings at the end of August in order for a decision to be rendered before the ticking fee is triggered. The states have asked the court to start those proceedings next year.
The states’ lawsuit filed on Monday alleged that the acquisition will substantially throttle competition in wide-release and top-grossing theatrical distribution and cable licensing in violation of antitrust laws. It argued that the merger will combine two of the top five studios in Hollywood, leading to higher prices, fewer movies in theaters, and a reduction in the variety and quality of content.
During the hearing, James Weingarten, a lawyer for the states, stressed the massive scale of the deal.
“This is the largest merger in Hollywood history,” he said. “It’s an industry-transforming merger.”
For every dollar generated at the box office, he added, the combined company will pocket more than a quarter if the transaction is allowed to go through.
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In merger challenges brought by the government, courts are typically inclined to grant temporary restraining orders freezing the deal. Preliminary injunctions are less likely. In a lawsuit brought by the Federal Trade Commission over Microsoft’s bid to acquire Activision Blizzard, the court declined to issue one. Shortly after, the tech giant closed.
The issue is significant because courts are much more open to outright blocking a merger than unwinding one, plus the the practical difficulties of decoupling two companies once they start to combine staff and operations.
Jeffrey Kessler, a lawyer for Paramount, argued that the states could alternatively look for a court order mandating a divestiture. He also underscored the delay in bringing the lawsuit when it was public knowledge that Paramount is looking to close the deal in July.
“They’ve known about merger since January,” he said. “They could’ve filed papers months ago or six weeks ago.”
Weingarten countered that there would be irreparable harm if the deal is allowed to close, pointing to productions being “brought under one set of managers to be tabled or reversed,” the sharing of confidential information and layoffs, among other things. “The competition that these two companies bring to the marketplace would end immediately,” he said.
A legal sticking point in the back-and-forth: The government’s 2023 merger guidelines, which lowered the market threshold for the presumption of a violation of antitrust law. Paramount argued that the guidance isn’t relevant.
“I stand by this statement: no court in this country has ever found a presumption at the low level of concentration in the 2023 guidelines they are citing,” Kessler said. “None. They are asking you to be the first court in history to do that.”
Weingarten said Paramount is “running as hard as they can” from the guidelines.
The alleged 30 percent market share the combined company would have for blockbuster films also meets the presumption of a merger undermining competition outlined in the Supreme Court’s decision in U.S. v. Philadelphia National Bank. Under the framework outlined in that case, it falls on Paramount to prove that the merger isn’t anticompetitive.
Paramount pushed to settle the case before it was filed, though the states weren’t open to behavioral remedies like producing 30 movies per year with a 45-day theatrical window. On KQED on July 15, 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.”
