BREAKINGVIEWS-Gulf Paramount bet’s logic is mostly non-financial

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Karen Kwok

LONDON, Dec 9 (Reuters Breakingviews) - The Middle East is writing a blockbuster cheque, for a financially uncertain M&A sequel. Saudi Arabia’s Public Investment Fund, the Qatar Investment Authority, and an entity controlled by the Abu Dhabi government are pumping $24 billion into Paramount Skydance’s PSKY.O $108 billion hostile bid for Warner Bros Discovery WBD.O $(WBD)$. The key plot twist – the Gulf funds will waive all governance rights, including board seats and voting power – underscores that their gambit makes most sense viewed through a non-financial lens.

Paramount CEO David Ellison’s bid, worth $108 billion including debt, would normally position the Middle East trio as lead actors. Of the $40.7 billion in equity, they are contributing nearly three-fifths. The 19% each would hold of the merged company’s shares, if split evenly, collectively hands them a majority stake. But to avoid triggering alarms from the Committee on Foreign Investment in the United States over foreign control of U.S. media assets, they have agreed to play supporting roles by going without typical shareholder rights.

Even without that curveball, WBD is a strange wager. Media deals, including previous ones involving the current target, have often gone awry: witness AOL and Time Warner’s $165 billion deal in 2000, which reported a $99 billion net loss two years later. Ellison, the 42-year-old son of Oracle ORCL.N founder Larry Ellison, only became Paramount CEO via an $8 billion merger in August, and his operating chops remain untested.

Financially, WBD is not exactly a must-see either. Deutsche Bank estimates the combined company will have net debt amounting to 6.6 times forecast 2026 EBITDA. Analyst estimates compiled by Visible Alpha assume $3 billion of operating profit for 2028, when Ellison reckons he can find $5 billion of cost synergies. Assuming a 20% tax rate that only implies a sub-6% return, three years hence.

All that said, the Gulf gambit has a basic logic. Larry Ellison, whose family is backstopping the bumper equity outlay, has been supportive of President Donald Trump. During his recent visit to Washington, Saudi Crown Prince Mohammed bin Salman pledged $1 trillion of U.S. investment. Backing this deal – which WBD may find hard to refuse – binds the Gulf and the current U.S. administration more tightly together.

Still, Saudi in particular seems to be spending more of its resources abroad instead of creating a thriving non-oil economy at home – Riyadh recently shelled out $30 billion to acquire Electronic Arts EA.O. The presence on the deal of Trump’s son-in-law Jared Kushner’s Affinity Partners – itself backed by the PIF, QIA and the UAE’s Lunate fund – may reassure the Gulf trio they have at least some oversight of what happens next. But as with Saudi and UAE’s $60 billion bet on Masayoshi Son’s Vision Fund 1 – which itself went awry – they are basically rolling the dice.

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CONTEXT NEWS

Hollywood conglomerate Paramount Skydance said on December 8 that it had made a $30-a-share, hostile all-cash offer to buy the entirety of rival Warner Bros Discovery.

Paramount said its offer represented a better deal for the company’s shareholders than a sale of the film studio and HBO streaming service to Netflix, which the board agreed to on December 5.

In a regulatory filing, Paramount said that the Ellison family, which owns Paramount, along with private equity firm RedBird Capital, had agreed to backstop $40.7 billion in equity capital. The offer also includes financing from Jared Kushner's Affinity Partners.

It also features $24 billion split between Saudi Arabia’s Public Investment Fund, the Qatar Investment Authority, and L'imad, owned by the government of Abu Dhabi.

(Editing by George Hay; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on KWOK/karen.kwok@thomsonreuters.com))