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For months, Paramount had been moving toward completing its acquisition of Warner Bros. Discovery was valued at $111 billion by July. It submitted paperwork to the Justice Department to bless the deal in December, even as Netflix appeared to be leading the bidding war. So far, it has received the green light from more than a dozen countries.
Those designs were scuppered when a coalition of 12 states led by California filed a lawsuit to block the deal, potentially putting an end to the planned closing date. The lawsuit brings to the fore the risk that Paramount will be forced to pay steep fees to Warners shareholders for the delay.
Paramount’s frustrations with the timing of the lawsuit came to light during a hearing Friday on whether the court should issue a temporary restraining order preventing the studio from completing the deal. U.S. District Judge Araceli Martinez Olguin said she would issue a decision by next Wednesday.
In what could be a sign that she was inclined to grant the states’ emergency request, the judge at one point confirmed that Paramount had acknowledged that it would not suffer any harm if the deal was put on hold for a short period.
After the temporary restraining order is decided, a mini-trial will follow on whether the court should issue a preliminary injunction preventing Paramount from merging or commingling assets and operations with Warners until the case is decided. If granted, there would be major financial implications for the company led by David Ellison. Under the terms of the deal, Warners shareholders are due about $650 million per quarter, or $6.9 million per day if the deal is not completed by September 30.
For Paramount, the time crunch is a major issue. The acquisition is offered not to close for up to a month if the court agrees to schedule preliminary injunction proceedings at the end of August in order to issue a decision before the visa fee takes effect. The states asked the court to begin those procedures next year.
The states’ lawsuit filed Monday alleged that the takeover would significantly stifle competition in the top-grossing broadband theatrical distribution and cable licensing in violation of antitrust laws. She said the merger would combine two of Hollywood’s five largest studios, leading to higher prices, fewer films in theaters, and a decrease in the diversity and quality of content.
During the hearing, James Weingarten, the states’ attorney, emphasized the sheer size of the deal.
“This is the largest merger in Hollywood history,” he said. “It’s an industry-changing merger.”
He added that for every dollar generated at the box office, the combined company would receive more than a quarter if the deal was allowed to go through.
In merger challenges brought by the government, courts typically grant temporary restraining orders to freeze the deal. Initial orders are less likely. In a lawsuit filed by the Federal Trade Commission over Microsoft’s bid to acquire Activision Blizzard, the court declined to issue a lawsuit. Shortly after, the tech giant closed its doors.
This case is of great importance because courts are more open to blocking a merger outright than breaking it up, in addition to the practical difficulties of separating the two companies once they begin to combine employees and operations.
States could instead look for a court order mandating divestment, said Jeffrey Kessler, a lawyer for Paramount. He also stressed the delay in filing the lawsuit when it was known that Paramount was looking to close the deal in July.
“They have known about the merger since January,” he said. “They could have filed the papers months ago or six weeks ago.”
Weingarten responded that there would be irreparable harm if he allowed the deal to go through, noting that productions “are subject to one set of managers to be brought up or reversed,” the sharing of confidential information and layoffs, among other things. “The competition that these two companies bring to the market will end immediately,” he said.
A point of legal contention in this direction: the government’s 2023 merger guidelines, which lowered the market’s threshold for presumed antitrust violations. Paramount argued that the directives were irrelevant.
“I stand by that statement: No court in this country has ever found a presumption of low concentration in the 2023 guidelines that they cite,” Kessler said. “Nothing. They are asking you to be the first court in history to do so.”
Weingarten said Paramount is “working as closely as we can” within the guidelines.
The purported 30 percent market share that the combined company would have of blockbuster films also satisfies the merger-undermining-competition presumption outlined in the Supreme Court’s decision in United States v. National Bank of Philadelphia. Under the framework outlined in this case, it is up to Paramount to prove that the merger is not anticompetitive.
Paramount pushed to settle the case before it was filed, even though states were not open to behavioral remedies such as producing 30 films a year with a 45-day theatrical window. On KQED on July 15, Bonta said a potential deal should include spinning off a movie studio, cable group or news channel. So far, he has resisted offers of behavioral therapies because they are “difficult to implement” and “easy to counteract.”
