Paramount Skydance bid to acquire Warner Brothers.

We've got antitrust considerations and even a bit of politics.

What's this about? Is this just the highest price? Why Paramount Skydance won the bid.

Who are the real winners in this deal? If you're Warner Brothers and you're the board, you need to make a recommendation to shareholders about which offer to accept.

Word on the street is that there was some advice given to David Ellison at the time of that acquisition that, hey, this deal does not paper out.

This is not a good deal financially. It's not a good deal for shareholders.

It means that they're going to end up with about $85 billion of debt.

Hey, Debs.

Hi, Graham, and welcome to all our listeners to this week's episode of "What's the Big Deal?" where we look across major deals in the private and public markets, and also look at developments in the finance industry. My name's Deborah Taylor, and my experience working in investment banking allows me to bring insights from a public markets perspective.

And I'm Graham Smith. I've got a few years of investment banking experience and a decade of private credit experience, and I'll be using that to bring the private market perspective here.

Fantastic. Okay, Graham, over to you. What is the big deal this week? I'm looking forward to this one.

Okay, so the big deal is a really big deal, and this is one I'm sure everyone watching about this has heard of already.

This is about the latest developments on the now Paramount Skydance bid to acquire Warner Brothers.

Obviously, this has been a really long-running merger fight at this point because we had Netflix had an agreed deal with the board of Warner Brothers to purchase the business last year, and Paramount Skydance has sweetened their bid.

They're now the board-recommended offer, and it looks very much like they're going to run away with it. So today, we want to dig under the hood of this a little bit, hopefully bring out a few aspects of the transaction you might not have heard about yet, and hope to have just a fun discussion.

Absolutely. It's such a great case study, this one.

There's so much to talk about, and we've got a high-profile deal.

We've got competing bids. We've got antitrust considerations and even a bit of politics thrown in there just for good measure.

So there's lots that we can talk about, lots that we can learn from about M&A.

In terms of what we'll cover, it's quite hard to narrow it down to just a few topics for our podcast, but I think if we talk a little bit about why Paramount Skydance won the bid. Why did they beat Netflix? We'll also talk a little bit about tactics.

Both sides used tactics to try and seal the deal, so what were those tactics that they used? And then thirdly, who are the real winners in this deal? And that's a big question.

Before we get into the nuts and bolts and the technicalities of this deal, I think it's worth just spending a second talking about what makes this a really interesting transaction. Deb, from your perspective, why is Warner Brothers so interesting, and why were Netflix and Paramount Skydance in a bidding war over it? Good question, Graham. I guess the first thing, and probably the main thing really, is the content library that Warner Brothers Discovery has.

It's got an amazing back catalog of movies.

Of course, "Harry Potter," DC Universe, "Game of Thrones," and then, of course, HBO. That's kind of the jewel in the crown with their big back catalog of TV series, "The Sopranos," "Friends," "Game of Thrones." So, so much there that they can gain in terms of having all that content available. Then, of course, at the moment, we've got the big battle for market share in the streaming market. This is kind of viewed as existential for Paramount because they have got much smaller share of the streaming market, and so acquiring Warner Brothers Discovery would give them that access to market to allow them to compete with the bigger players. The third thing is that both Paramount Skydance and Netflix have identified huge synergies. And in fact, for Paramount Skydance, they're about $6 billion. That's about 15% of Warner Brothers Discovery's revenues. I mean, that is huge.

They've talked a little bit about the nature of those revenues, but I suspect a large proportion of those will come from the linear business.

But yeah, it makes it a fantastic target on the surface, I should say.

But yeah, lots to make it an attractive deal.

Okay, and now that we have some kind of resolution on the proposed deal, i.e. Warner Brothers' board has recommended the Paramount Skydance bid, what's this about? Is this just the highest price, or are there other mechanics built-in that make that offer more attractive to Netflix? Yeah. Graham, it's a really good question because ultimately, we all think it's all about the highest price. But I think the more we can put ourselves into the perspective of someone who's... It's equivalent to selling your house.

That it's not just about price. Of course, a high offer is attractive if you're selling, but there are subtleties within there that can influence which bid is preferable.

For example, a cash consideration.

Cash always beats equity, so the offer with the highest cash consideration will usually be preferable.

There's also financing risks. If you have a buyer who you think is a risk around their ability to raise debt and that affects their ability to seal the deal-Well, maybe that makes the offer, even if it's a higher offer, less preferential for you.

And certainly in this deal where you've got bidders with very different scales. We've got Paramount, Skydance, market cap of only $15 billion versus Warner Bros Discovery's acquisition equity of about $80 billion. So, certainly the financing risks, I think, will play a part in this deal.

And then finally, other risks that could affect the ability to close the deal, for example, antitrust. We know that that keeps cropping up in all the news articles around this transaction.

So any risks that prevent the deal from actually closing will also maybe be a consideration. So it's not just about the price.

So with that in mind, I know, Graham, that you've done quite a bit of digging around into the offers and also the financing.

You're so good on the financing side, Graham.

Can you talk us through which bid do you think is better, or at least from Warner Bros Discovery's perspective, which is better? Yeah, and here's where I think we need to dig under the hood a little bit and compare the two bids because they're not actually apples for apples.

So if you've been following this transaction for a while, you might have seen that in the Netflix bid, this is not actually a bid for the whole business. So when we compare the Netflix 27.75 and the Skydance Paramount 31, those aren't actually apples for apples comparisons.

So under the Netflix bid, the proposed structure was Discovery Global, in other words, the linear TV business that no one's really excited about, that was going to get spun off to shareholders, and then Netflix would purchase the streaming catalog, HBO, kind of Deb's, as you mentioned, the crown jewel of Warner Bros. So when you compare the two bids together, you really have to say, okay, this Netflix 27.75, that's just for the streaming business. We need to add on the proposed value of Discovery Global to see where these two bids compare.

So I spent a bit of time going through the fairness opinion, so you can see exactly where the various valuation ranges for both the streaming business and the linear TV business are.

You can also see the comp sets used for both.

It's actually really anyone who's looking to kind of dig under the hood of a merger, these are really interesting documents to go review because you get a bit of information and insight into how the valuation was actually done.

And Graham, can I just quickly ask a question? Because maybe not all of our listeners are familiar with the fairness opinion.

What is it, and is it always required in an M&A deal? Yeah, so a fairness opinion is basically, so if you think about all the work that happens in a big transaction like this, a huge part of this is rubber stamping the valuation that, in this case, Paramount is going to acquire Warner Bros for.

And if you're Warner Bros and you're the board, you need to make a recommendation to shareholders about which offer to accept.

So you often will approach an investment bank to provide a fairness opinion. All that is, is basically a piece of paper that says, "Hey, we've done the work on valuation and we think this deal is realistic." The Warner Bros board is going to use this opinion as a way just to rubber stamp the value on the transaction.

And it's kind of funny, if you think about, actually if you look at what's in the fairness opinion, a lot of it is basically spreading transaction comps and spreading trading comps.

And you have the sum of the parts valuation that takes Warner Bros streaming, adds on the linear TV business, and then gives you the valuation for the total group. At JP Morgan and I think one other investment bank both provided fairness opinions here.

They got paid $90 million each just for this opinion.

So it's kind of a weird one in the sense that it's not actually that much work, but it's obviously really valuable and really important so the Warner Bros board can say, "Hey, we're not just recommending this blindly.

We have some real advisors who have done the work who are rubber stamping this opinion." Fantastic. And so coming back to the comparison of the two deals, can you dig in a bit more and sort of highlight where you think, in particular Paramount/Sky, where they really kind of clinched the deal compared with Netflix? Yeah. So a few things to talk about here.

So the first is let's look at these bids on an apples to apples comparison.

And in order to do that, we need to take Netflix's 27.75 cash bid for the streaming business and add on the proposed valuation of Discovery Global that would've been spun out to shareholders.

So if you were on the Netflix deal, if you were a shareholder in Warner Bros, you'd wind up with some cash and then you'd wind up with a share of Discovery Global. So if you look through the fairness opinion, we've got a valuation range that's pretty wide for that business.

I think it's like $1.30 a share to six something dollars a share.

So if you take the midpoint of that valuation range, you get about $4 a share. If you add the $4 to the 27.75 Netflix cash bid, you actually say, "Hey, the Netflix bid is a little bit more valuable, so what's going on?" I think once you start to dig into the actual valuation work, the trading comp valuation starts at that $1.33 a share and tops out at the $3.24 a share. So if we just take the trading comp range and we take the high end of the trading comp range, 3.25, add that to the Netflix bid, all of a sudden these bids are exactly identical in terms of value.

There's a good argument kind of intrinsically that the trading valuation is the right one to use for Discovery Global because ultimately in the Netflix bid, that business wasn't getting acquired.

It was just getting spun off to shareholders.

You're taking some risk as Warner Bros in terms of where that business is going to trade once it's spun off.

If you really believe the trading comp valuation, then all of a sudden you've got almost exactly an equivalent bid between Netflix and Paramount/Skydance. Then I think what we need to do is start looking the next layer down and thinking about what other sources of uncertainty were there in the Netflix bid that the Paramount/Skydance bid is addressing. And there were a couple, right? I mean, one is you have the... have the transaction uncertainty of completing this whole spinoff. That takes time, it costs some money.

You don't know exactly how it's going to trade.

The other thing that a lot of people I don't think realize is in the Netflix bid, the cash consideration wasn't actually straight 27.75. It was actually going to be a range, and the range depended on how much debt got pushed down from Warner Bros.

into Discovery Global before it got spun off.

The more debt that got pushed down, the less debt would be at Warner Bros., and the higher the cash consideration would be.

And of course, the inverse was also true.

Are you saying that actually the shareholders, Warner Bros.

Discovery, weren't necessarily going to get 27.75 in cash? They might have got less than that.

Exactly.

Wow. That really wasn't reported, was it? No, and so the whole reason that the board of Warner Bros.

was comfortable with the approach was if you really think about the technical aspects of valuation, if there's less debt at Discovery Global when it got spun off, the equity value would be higher. If there was more debt, the equity value would be lower.

So in essence, the argument was these two things should net each other off, and as a shareholder with both the cash consideration and a share in Discovery Global, you'd wind up in the same position either way.

But of course, this assumes that markets are technically perfect and are going to value this exactly as the board thought they would.

But we know that's not the case, so there's a decent amount of uncertainty in this valuation here.

Yeah, for sure. Presumably then there's just still including an equity component effectively by having that, by if you get less cash, you get more equity. So it's still a softer proportion of the offer in cash.

Yeah, exactly. And you have the timing, you have the uncertainty. It's another thing that you have to do.

So if you just think about the two bids, zoom out for a second, look at the two bids together, you basically say, "Okay, they're both worth about $31 a share." By the way, I think that valuation is incredibly full, and we can talk about that in a second. But both were $31 a share.

Paramount Skydance is proposing a pretty aggressive timetable. It's 100% cash for 100% of the business. There's no spinoff. As a Warner Bros.

shareholder, you get your $31 cash, and you're not wound up with this TV asset that you might not like that much anyway because these businesses are pretty tough and kind of going away.

So Graeme, you're really selling the Paramount Skydance offer here.

It makes it sound very clean, very secure in terms of the amount you're getting. But is it as easy as that? Are there things that would make Netflix preferable in the choice between the two offers? I guess it depends on what perspective you're coming at this from.

If you're a Warner Bros. shareholder, I think it's really hard to argue that the Netflix bid is superior because at this point, both offers are cash, so you're going to get cash in either way.

You've got certainty of cash payment from Paramount Skydance. You've got certainty of valuation over that linear TV business, which is right at the top of the trading comp valuation if you compare, again, those two offers versus one another.

So I think you're hard-pressed to make an argument that if you're a Warner Bros.

shareholder, you would prefer the Netflix bid.

Then, of course, you have all the regulatory antitrust considerations, I think it's fair to say on both sides of the table here.

In both cases, you've got streaming businesses that are going to be put together. These guys are all arguing this is going to be great for the consumer. But there's of course a world in which you have a Paramount subscription for 15 bucks a month and an HBO subscription for 15 bucks a month, and put them together, and they say, "Hey, all of a sudden now we have this amazing Paramount HBO offering for $40 a month." There's a chance that could happen. So I think you're hard-pressed to say from a consumer perspective any of these deals are great.

But certainly from a shareholder perspective, I think the choice now is pretty clear and pretty clean.

What about politics? It's kind of played a little role in the background. We've had a bit of commentary from politicians here.

So do you think that's influenced the deal? I think it probably has, and here's where you have to really look through at the underlying shareholder base and really owner of Paramount Skydance, and you've got David Ellison, who's the guy at the helm right now.

He's the son of Larry Ellison, who's, I don't know, I haven't looked at the Forbes list recently, but I'm guessing, what, top 10 in terms of global wealthiest people. He's well known to be friendly with Trump and the current administration.

So I think, again, if you are a Warner Bros.

shareholder, you look at that relationship and you say, "You know what? As messy and as murky as it might be, having David and Larry Ellison close friends with Trump, the chances of getting this deal approved at a regulatory level quickly are higher than maybe they would've been with Netflix." And obviously, Paramount Skydance is really backing themselves on this, right? And they've committed to a closing timetable, I want to say, of the end of September, and then if it doesn't complete by the end of September this year, then there's a ticking fee. Ticking fee basically just says, "We're going to keep adding on value. We're going to pay more the longer this transaction runs on." They've obviously really been backing themselves to figure out the regulatory hurdles here.

Yeah, it's interesting, isn't it, Graeme? We did speak about this deal when it first became really public in December, and when we were talking about it, I don't know if you remember, we actually, both of us, said at that point that we thought that Paramount Sky would be the successful bidder because of that political influence, and a little bit on the antitrust side. And then it seemed like Netflix were going to storm away with the victory, and it's suddenly at the last minute, there's been this plot twist back to Paramount Skydance.

So we called this- We did ... a long time ago.

We did. Our first call- But- ... totally right. We should dig up that recording just so everyone knows we got it right.

Absolutely. So we called it, but I don't think we should underestimate the influence of politics when it comes to these deals.

That ultimately can have a huge impact, can't it? Well, I think influence of politics, the other thing to bear in mind here is just, again, we were talking about David and Larry Ellison, is trying to make a name for himself in Hollywood.

And at this point, he's just out to build an empire.

So I'm figuring out how I can obfuscate this information in a way that's not going to tie it back to anyone personal, but one of my good buddies was around the original Paramount Skydance transaction from a couple of years ago.

And word on the street is that there was some advice given to David Ellison at the time of that acquisition that, "Hey, this deal does not paper out.

This is not a good deal financially. It's not a good deal for shareholders.

The reason you would do this deal is if you want to build a name for yourself and build an empire." So I think also with that in mind, it kind of explains where we are in this process, where Paramount Skydance is in terms of valuation, because in some ways, up to a point, the technicals stop mattering when you've got the son of a billionaire with basically unlimited resources who's going to say, "Hey, Daddy, I'd like to go buy a TV company.

Can you give me $50 billion to do it?" And he's like, "Yeah." So at that point, some of the fundamentals stop mattering when you know you've got a guy who's just out to go build his empire.

So the fact that we've wound up here actually doesn't surprise me in the slightest.

I think what we can learn from this transaction is there's been some tactics used during the bidding process, haven't there, Graham? We've had the two, if you like, the two horses, as it were, in the race trying to get the edge over the other over the last couple of months.

And I think it'd be interesting to hear, to talk through some of those tactics.

I'll kick us off with the first one, which I think is the obvious one, which is obviously raising the offer. We started off with both parties with slightly lower offers. I think Netflix originally offered $27, and Paramount Skydance started with $30.

So both kind of nudged up their offers very slightly.

But also Netflix, as part of that, as you mentioned earlier, they increased their cash consideration within that. So that was to try and sweeten the deal slightly for the shareholders.

Netflix early on were quite smart in introducing a termination fee. So when the original deal was accepted by the board of Warner Brothers Discovery, they negotiated a $2.8 billion exclusivity lock-in, if you like, which means that even now with Paramount Skydance as the victor in the deal, they have to now pay Netflix $2.8 billion to get them out of that exclusivity deal. So both parties introduced a regulatory termination fee to try and manage the risk around antitrust. So Netflix, they came up with a $5.8 billion regulatory termination fee, whilst Paramount Skydance, they offered a $7 billion fee.

So both of them trying to reassure the shareholders there on the regulatory side.

You mentioned earlier this ticking fee.

Can you talk us through that please, Graham? Because that's an interesting one.

That doesn't come up often in deals, does it? Yeah. So I think all these things are basically highlighting just how confident Paramount Skydance is in terms of getting this deal through.

So one, you mentioned the regulatory termination fee.

If for whatever reason the regulator doesn't approve this deal, Paramount Skydance is just going to have to pay another $7 billion, in this case, to Warner Brothers shareholders, in addition to the 2.8 they've already paid out or are going to pay to Netflix shareholders.

That's $10 billion in cash fees on the table.

Then the ticking fee is basically- And that's if nothing happens. That's if the whole thing falls apart.

They've spent $10 billion on nothing.

Exactly, right? Yeah. It's crazy.

Again, "Hey, Dad, can I have $10 billion to pay a ticket?" "Yeah.

Okay, sure." It's nuts. So then you have this ticking fee, which is basically a way of saying, additionally, we are so confident that we're going to get this deal done in a short period of time that if we don't, every quarter we're going to increase our offer by, I want to say it's 25 cents a quarter after September 30th, 2026.

So if this deal hasn't closed by the end of September, the deal value starts ticking up from $31 a share to $31.25, then $31.50, until ultimately the deal either completes or it falls apart.

Okay. So this deal can get really expensive if it drags on, can't it? Yeah.

So that's to help manage the risk around whether the deal will close quickly enough.

And then in addition to that, we've had, particularly for the Paramount Skydance offer, there were concerns around the robustness of the financing.

So Larry Ellison has personally guaranteed any additional equity funding that would be needed to support the bank financing, because obviously, as we've said, we don't actually know how much the deal is going to close for because there's an open timeline here. And so they've guaranteed that that financing is in place. On top of that, we've had a bit of a PR campaign, haven't we? We've had Larry Ellison writing an open letter to the shareholders to encourage them to accept the offer.

And then we had David Ellison writing an open letter to the UK creative community to garner support from them.

They gave a really strong commitment on creative output.

They said there were going to be 15 feature films per annum per studio.

So that's 30 films per year. And all of those movies will have cinema releases.So they're trying to get not just the shareholders, but almost all the other parts of the industry on board to try and convince them that this is the winning deal or winning bid. So we can really see the tactics that are being used here to try and beat Netflix with the winning bid.

It's kind of funny, though, when you think about the people they're going out to, to try to gain some support. Approaching the community, the creative community, rather, saying, "We're going to produce all these movies." At the same time, they're saying, "We're going to take $6 billion of cost out of the combined business." A lot, of course, is going to be in creative salaries and whatnot.

So if you're in the creative industry or you're an employee for one of these businesses, you probably have different feelings about this merger than you do if you're a shareholder. By the way, I have no idea how we can really get fully comfortable on this $6 billion synergy number.

I think that is one thing that we'll know from teaching valuation is anytime you ever see a public merger announcement, it's almost always reported to be accretive, and most of that is given by the fact there's just almost an unlimited synergy potential you can put into a press release. So how much of that actual $6 billion gets realized remains to be seen. I think they've even said it's going to take us five years to achieve it all.

So if we never get there, I don't think anyone's going to be too surprised.

Okay. That's interesting to hear.

And so coming back to the technical points really, you mentioned the fairness opinion, and so that gives some view on what Warner Bros.

Discovery's actually worth as a business. Can you expand on that? Talk us through a little bit, what was in that fairness opinion, and whether it supports the price that Paramount Skydance are offering for the business.

Here's where you need to dig under the skin a little bit and really look at the detail of what's in this fairness opinion to figure out what's going on.

And the reason I say that is, at the core, the fairness opinion basically has a set of trading comps and a set of transaction comps applied to both the streaming business and the linear TV business, and they put it together in a sum of the parts valuation.

And if you look at the valuation range in that fairness opinion, we're basically at $31 a share. We're basically right at the top, if not just over the top end of the transaction comp valuation range. And you say, "Okay, this is a public merger deal, so we expect the transaction comps to be the right comp set for a deal like this." But then what's interesting is if you start looking at the actual precedent transactions in those comp sets, it starts to get a little bit murky.

I say that because especially if we're looking at something like the linear TV business, we don't have a lot of really great precedent transaction comps that are recent for a business like that.

And I know we talked about the trading comp valuation being the right one to use for that business, and I do think that's right.

But if you look at the transaction comps overall, I'd say the last really relevant transaction comp we have here is AT&T Time Warner from, what, 2016. So we're already 10 years out of date on our realistic comp sets. The most recent one we've got in the comp set for this transaction is Skydance's original acquisition/reverse merger, whatever you want to call it, with Paramount. I don't have the detail- What? That's completely circular.

Exactly, right? Because to that whole point of David Ellison is on this empire-building campaign.

We know the technical financials of the original deal probably didn't make that much sense. We're now using that as a signpost for the valuation here, and we're above it just a little bit. So you can make the argument that David Ellison is just negotiating against himself right now.

So again, I think if you're a Warner Bros.

shareholder, you've got to say, "I'm going to take this money and run." So you're using, well, basically the investment banks were using Larry Ellison's previous deal to provide an opinion on his latest deal. That's almost movie worthy, surely.

Right. I know. We'll see if this gets reported somewhere in, was it CBS News that's run by Paramount? So I don't know.

Oh, yeah.

It's wild.

We'll look forward to that. So I guess the question for you then, Graham, a tricky question. Do you think this is a fair price for Warner Bros. Discovery? Based on what you've seen in the fairness opinion, based on what you know about the transaction comps, do you think they're overpaying? Do I think Paramount's overpaying? Yeah, probably. Right.

Do you think if you're a Warner Bros.

shareholder, you've made out incredibly well in this deal? Absolutely. If you read the news, I actually can't remember his name, but the CEO of Warner Bros. I think is going to make $700 million out of this deal. So if you're one of the existing shareholders in Warner Bros. before all this merger talk, you've probably wound up in a pretty good spot. And then it remains to be seen if you're a shareholder in Paramount Skydance, how this ultimately pans out in the future. Because I think based on the fairness opinion, you can say, technically speaking, we paid right at the top of the range.

Again, if you dig under the hood and say, "Okay, what are the actual comps in that fairness opinion?" I think it's pretty easy to say, yeah, Paramount Skydance is overpaying today. And then we'll see how much this $6 billion in synergies actually gets realized, and that feels really punchy to me. I know you say 15% of revenue, but it's a big number. So I don't know. I think we'll need to check back in a couple of years and see how it's doing, if we can even compare apples for apples, because in two more years, David Ellison might have gone and bought a bunch of other stuff.

We'll see how it all turns out.

Well, you say that, Graham. I've got a bit of a treat for you because I've actually done some analysis. My heritage as an equity research analyst forced me to run the numbers on this deal.

And I've made some big assumptions and all of my analysis, we'll make it publicly available, we'll add it as a link so you can download and have a look. Some big assumptions made, but one of the key things we used to look for in a deal was always EPS accretion.

And they haven't actually quoted this in any of the press releases or any of the documentation, which is unusual because it's usually the go-to metric to prove that this is creating value for shareholders.

Because it's basically saying, well, at the moment, what are you getting for each share that you own in terms of earnings? How much more will you get as a result of this transaction? And when I run the numbers, even with that $6 billion of synergies, I get quite low EPS accretion because you've got to remember, there's a huge amount of equity financing going into the deal.

That means there's a huge amount in the number of new shares, which are going to be included. So that really does create a challenge, a hurdle, if you like, for EPS accretion. So I get around mid-single digits EPS accretion. We're talking about 5%, 6%, which for a deal like this actually isn't that impressive, particularly a deal where you've got so many risks associated with execution and even trying to achieve those synergies.

So that's the first thing is EPS accretion, in my mind, is not that impressive.

Secondly, you've got loads of debt.

I mentioned right at the beginning how big this is as a target for Paramount Skydance, and it means that they're going to end up with about $85 billion of debt. That's about $45 billion from the existing businesses-Plus $40 billion of new debt as part of the acquisition.

And that- Am I right in thinking the multiple on the combined business is seven and a half, eight times leverage? So I think it's close to six times EBITDA.

Okay.

Yeah. So I get about six times EBITDA, but you are right to be nervous, Graham, because actually already S&P have placed Paramount Skydance on credit watch with negative implications, which basically means they're saying, "We've got eyes on you because this is a huge amount of leverage for a public company." Usually anything over about 4, 4.25 times is considered high levels of leverage. Definitely, the leverage is a big concern.

Yeah.

So the second thing- That's firmly LBO leverage territory, right? Six times...

As I said, I saw analysis, it was more.

Whether it's six or seven, this is a lot of debt on a public company. And I know they are-- I don't think they have an idea yet of exactly how it's going to be tranched out.

They're saying some is going to be investment grade, some will be sub-investment grade. But even placing that amount of debt has got to be a challenge.

Absolutely. And the only way they get away with it at all is because they are arguing that they're going to de-lever really quickly.

They're literally saying that within a few years, it's going to be down to well below that four times range. But honestly, it is- Sure. Who hasn't ever said that before? Yeah. Absolutely. And will they actually achieve it? We'll sit and watch those synergies then, shall we? Exactly.

And then the final thing to highlight is, whatever the numbers say, in reality, it's really hard to execute a deal really well. This is an expensive deal, and historically, particularly deals in the media industry have not gone well. Particularly big deals in the media industry.

Research shows that in general, if you have a large target relative to the acquirer, and we're talking a target that's more than about 15% of the acquirer in terms of size, it's less likely to create value.

And this is a big acquisition from Paramount Skydance.

So mega deals in the media industry have a really poor track record.

An AT&T Time Warner, even the Disney Fox deal from a few years ago. And both of those deals are really questionable in terms of value that they created for their shareholders.

So there's big risks. Very little on the metrics that suggests that this is going to blow the market away in terms of the value creation. And then on top of that, of course, our favorite topic, we've got AI going on in the background, disrupting all of the markets, and we've got that new threat around geopolitics.

So this is a really risky time to be doing a very big deal.

Yeah, 100%. If you want to take the contrarian view on the AI trade here, you can say, well, part of that $6 billion might be more realizable because of things like AI.

Then, of course, you're going to have a huge creative industry backlash because so many people are going to be out of work, and it just feels messy. Of course, the only one who's really happy right-- Well, I think there are a few people who are happy right now.

Warner Brothers shareholder, your Warner Brothers CEO, you're probably happy with the cash you're getting paid. Netflix even, you got paid some cash just to walk away. But the main winner right now is probably David Ellison, because he's going to sit atop his throne of this bigger media conglomerate. Who knows what actually happens with it, but he's playing CEO right now, and he's getting what he wants.

So that's interesting you say that he's the main winner.

So let's talk about the winners and the losers here, starting with the other winners. Anyone else you think that's seeing upside from this deal? Let's see. If you're a Paramount shareholder, you've seen a bit of...

I think if I looked at the stock price recently, you've seen a bit of value creation just because of where David Ellison, sorry, where Larry Ellison is committing to subscribe for more equity.

So in a recent share price jump on that basis.

So you probably want a little bit. Again, if you're Netflix, you got paid some cash to walk away. If you're a Warner Brothers shareholder, you're getting arguably overpaid for the value of the business right now. And then if you're a Paramount Skydance shareholder, who knows, right? It's too early to tell, I think, in terms of where this goes.

So many risks in terms of the synergies being realized, in terms of long-term value creation. There's just a lot going on. We'll see.

Yeah, it's interesting. And I think, Graham, I'm actually going to be a bit more bearish than you on this. I would say that almost everyone's a winner apart from Paramount Skydance's shareholders.

Because as you say, Netflix, they get the fee, they walk away without the headache of a big deal to deal with.

You've got all the advisors who are involved getting their fees.

Obviously, we've got those that wrote the fairness opinion walking away with- A1, I forgot to mention them. Was I right in seeing the total investment banking fees here are half a billion dollars, something like that? In that region anyway? It's nuts.

Yeah. To be fair, if you're advising on a deal, or if you're advising on the Netflix deal, you wouldn't have got your fee. It's usually a success fee.

But pretty much all the other advisors, those that issue the fairness opinions, they get well rewarded for their work.

$90 million for spreading some comps.

So just saying, I'll do that next time for 89.

Yeah. There is a bit of risk involved, to be fair.

You're putting your name to a valuation.

You could get sued if people didn't- I'll work for $89 million. That's fine.

Fair. Okay. We'll call you in next time, Graham.

But then finally, ultimately, the question is, what about Paramount Skydance? You mentioned Larry Ellison. He's potentially a winner.

He's got his legacy all set up now. But the shareholders, the poor shareholders, they are taking on so much risk. They're paying so much for this transaction. I would say they're probably-- I'd say this is a hollow victory. I'm going to call this. Yeah, definitely, I think it's a hollow victory for them because there's so much risk those synergies don't crystallize, that there's so much going on in the market at the moment that things don't play out as they hope. So that would be my key takeaway.

Are you a Paramount Plus subscriber, Debs? No, I'm Netflix, sorry.

Okay. I would argue the Paramount Plus app is the worst of the streaming apps. It doesn't keep track of where you are in shows.

It just sucks. So- Oh, it's a crime ... David, if you're watching this, take a billion of that, well, 100 whatever billion dollars, and just make your app better. That's all I want.

Right. Request from Graham there. Hope it goes straight to the top.

Oh, well, that's really interesting discussion.

I hope everyone who's been listening has learnt something about that transaction and a little bit more about the economics of M&A and what might help to clinch a successful deal.

Yeah, it's definitely- So I hope you enjoyed the episode ... a lot to talk about. There are a lot of moving pieces, a lot of things that aren't exactly what they seem at the surface level.

So I think the main takeaway for me here is whenever you're looking at a deal like this, make sure you actually do some work and understand, if I want to compare, say, this 27.75 to this 31, are these actually apples for apples or like for like comparisons, or do I need to take it a next level down? Most often the answer is you need to go to the next level to really understand what's going on.

So I hope we, in the last half hour or so, gave you a bit of insight into some of the details here.

If you got more questions, leave them down below in the comments, and otherwise we'll see you next time.

Yes. Until next week, same time, a new deal, and some fresh insights from myself and Graham. Take care.