PARA, WBD Merger Trial Looms: Financial Incentives and Regulatory Hurdles

**SPEAKER_1** (0:00)
Joining us now Roy Behren, the co-president and co-CIO at Westchester Capital Management and the co-portfolio manager of the Merger Fund. Roy, great to have you on. I make no secret how much I love the drama and intrigue that is this merger. Even since Netflix was involved, I have been fascinated by it. How are you looking at these latest developments, the UK approval? We now have a date for the trial. We've got Gavin Newsom now saying, he hopes they can come to some sort of agreement outside of this lawsuit, discouraging the Attorney General.
A lot to unpack here, but I guess my first question should be, do you think this deal is going to go through and when?

**Roy Behren** (0:42)
So in a word, I would say yes, we think the deal is going to go through. It's tough to say when. There's a lot of pressure on the parties to settle. Rob Bonta, the California Attorney General who has brought the suit and is the lead plaintiff in this, is running for re-election in November.
He wants to look like he's defending the rights of the citizens and the businesses that work there. But on the other hand, there's incentive for the buyer to settle this soon and offer some concessions. Paramount, as we've discussed, is if the deal doesn't close by the end of September, owes an extra 25 cents per share on top of the $31 consideration that Warner Bros. shareholders are already going to get per quarter. So for every three months, the price of poker goes up, if you will.
Additionally, if the deal doesn't close at all, Paramount is going to owe Warner Bros. a $7 billion termination fee. So there's plenty of economic incentive for them to close the deal. Additionally, if you look at the regulatory approvals that have been received so far, as you pointed out, Europe was just received this week. But beyond that, they've gotten 60 approvals already, including basically every federal governmental approval from various countries in Europe, in South America, in Asia. The United States, the Department of Justice did not have a problem with the transaction closing. They cleared it from an antitrust perspective. But Attorney General Bonta's lawsuit is predicated upon the unfair agglomeration of power and violation of the antitrust rules. It's quite possible that the parties can offer some concessions that would allow him to kind of exit the lawsuit gracefully and claim that he declared victory and said, well, I got from them a restriction on the number of movies that they're going to create or a minimum number that they're going to create over the next year or so as the parties have offered in Europe. And then also, there might be a political element to this as well.
You have Warner Bros. owning a CNN network, which is, some people have said is slightly left-leaning, who knows? The Ellison family has been accused of being slightly right-leaning, and there is some fear that they may try to stick their finger in the editorial process. But again, there are ways to solve that as well, and just appoint an independent editorial board, etc. But there's a lot of incentive for both parties to come to the table here and resolve this.
We think that there's a good chance that the deal arrives at a conclusion and an amicable settlement sometime over the next 6, 7, 8 months or so before the clock starts ticking on this ticking fee, so to speak. But ultimately, I think the odds are very high that the transaction does ultimately close. I mean, think about that. Over 60 regulatory authorities have already approved this, but California, in conjunction with the Writers Guild, brought suit. And maybe it's just to kind of twist the screws a little bit and get some kind of a concession.

**SPEAKER_1** (3:51)
So let's look at the potential impediment here and any of its merits, if you think there are any. As we look at the argument that's being made by the plaintiffs, they're making this argument that the combination is going to lead to fewer movies, less competition for distribution, potentially fewer opportunities for writers and actors and production crews, particularly at the mid and lower level in terms of production budget. How serious are those concerns? Because you sent over some great data that I haven't talked about in covering this story about the actual combined company percentages. So I want to share that before you answer. The combined company would account for about 13.4% of television viewing time when we include YouTube TV, which we should because it is so popular now, and about 18% of domestic theatrical box office over the past year. Do you view those as being supportive of all of the antitrust approval they've already gotten, or does it perhaps show that there could be too much market power in the hands of one combined company?