But first…

And now, the main event…

There’s now been nearly a month of eerie silence since The Wall Street Journal published the leaked news about Paramount Skydance’s planned takeover of Warner Bros. Discovery—an eternity of inactivity in Wall Street M&A terms. I’m told that WBD C.E.O. David Zaslav has hired Goldman Sachs and the Ellisons have hired Blair Effron at Centerview—serious M&A firepower—and yet, as the weeks pass with no further announcements, questions have inevitably been raised about the likelihood of a deal.

The research analysts are already offering some circumspection. On September 26, KeyBanc’s Brandon Nispel downgraded WBD’s stock after its huge run-up in the weeks following the Journal leak, reasoning that the takeover speculation had already pushed the price beyond what its operating fundamentals would support. If no deal from PSKY for WBD materialized, he warned, the downside risk to the stock would be significant.

Nispel suggested that there is a 50 percent chance PSKY won’t make any bid at all for WBD, in which case WBD stock would surrender its speculative gains and return to trading at around $12 per share from its current $19. He put the likelihood of a PSKY bid at 40 percent, and posited that the takeover value of that bid would be $25 a share. (As always, this is not investment advice.) Nispel’s other scenario, with a 10 percent probability, was a “bidding war” for WBD, which would drive the targetco’s stock price to around $40 a share. (I’d say 10 percent is too optimistic there, but I agree it’s at least possible.) “We continue to like the fundamental improvement story,” Nispel wrote, “though there is likely downside from here if a deal fails to materialize, as the probability-adjusted return from various scenarios seems low.”

Then, last Monday, CNBC deal maven (and my friend) Dave Faber suggested that PSKY would still make a bid for WBD, but that the negotiations would be intense—or even hostile. A “friendly deal seems unlikely,” Faber said. “My expectation is that Paramount will make an offer, that they will not be able to get something done friendly, via conversation, and therefore will have to come forward with an offer, and then it will be up to the board of directors.”

Of course, lots of deals that start out unfriendly—or even hostile—end up closing once the bid price enters a range that the board of directors has a fiduciary responsibility to accept. Tactically, Zaz may be digging in his heels in order to draw out the process, force the Ellisons’ hand, and entice another bidder. But the idea that PSKY may have to go hostile, or make an offer directly to shareholders, has a very different vibe than the one that we were all presented with three weeks ago, when even Faber was suggesting a deal could get done in the $22-to-$24-per-share range. Faber also said that it’s “very much unclear” whether Paramount will be able to reach a deal “quietly” with WBD, leaving Wall Street “wondering and waiting for when, in fact, said offer will be made.”

The following day, longtime BofA Securities media research analyst Jessica Reif Ehrlich threw even more cold water on a PSKY-WBD merger. “It is our view that as a standalone entity WBD’s streaming and studio assets would generate a bidding war amongst potential buyers,” Jessica wrote, “and therefore, we believe a split of the company can garner the greatest potential value.” (My emphasis, not hers.)

Jessica’s note was the first to support my thesis from last week—namely, that Zaz might be able to persuade WBD’s board of directors that, in the long run, his split-up plan, announced in June, would produce more value for WBD shareholders. Either way, Zaz’s split is expected to close next April, which could be in the ballpark of when any Paramount Skydance deal for WBD would close, given the time it takes to file the required documents with the S.E.C. and get approval from the regulators—even if the Ellisons already have some dealmaking experience under the current administration.

So, can Zaz effectively argue that his split-up plan will create more value for shareholders than a cash-and-stock bid from PSKY? The post-split Streaming and Studio business, which Zaz would run as C.E.O., would be a highly attractive M&A target for the likes of Netflix, Apple, Amazon, or even Comcast’s NBCU. And, frankly, Jessica’s imprimatur offered a whole new level of credibility. “We continue to believe the WBD Streaming and Studios businesses are crown jewel assets in the media ecosystem,” she wrote. “As we have written previously, we believe there will be significant demand for the Warner Bros. assets following a split of the company.”

Jessica added that, “at takeout valuation,” post-split, WBD should be worth more than $30 per share—more than PSKY is currently contemplating forking over. (She also argued that the market is underestimating the value of what will become Gunnar Wiedenfels’ Global Networks business. This is all very fascinating.)

I can confirm that the Paramount Skydance board of directors met recently to authorize something—an actual bid? Continued exploration of a bid? Who knows? If PSKY decides to proceed, any cash-and-stock bid for WBD would be fully financed, with the cash portion coming from Larry Ellison, or a bank or private credit borrowings, or likely a combination of both. The days of the Highly Confident letter are long gone, so it would be idiotic for the Ellisons to proceed to bid for WBD without the financing lined up. The Ellisons, and their partner Gerry Cardinale at RedBird Capital, are some of the smartest dealmakers in the business. (A spokesman for Paramount Skydance declined to comment.)

Meanwhile, my sources on Wall Street are also starting to voice skepticism that a deal will materialize. One esteemed source wrote to me that “the whole thing feels very J.V.” and that there has been no bid for WBD because “there is no money to finance a bid.” If Larry Ellison were funding the deal, he hypothesized, it “would have happened already.” Ellison, even with his $350 billion fortune, doesn’t have $50 billion of cash “lying around,” as this person put it. He would probably need around $100 billion of Oracle stock, or other assets, available to be margined—at 50 percent—to get the $50 billion in cash to buy all of WBD. Plus, PSKY would have to assume WBD’s $30 billion of net debt.

Ellison, this person continued, didn’t become the third-wealthiest man in history by making emotional decisions with his money. Would Larry really want to pledge one-third of his fortune to the combination of PSKY and WBD, a deal that would combine three movie studios with a bunch of declining cable channels and two big newsrooms? “It’s also already leveraged,” he wrote “This all looks absurd now. Something doesn’t add up. It just smells funny.”

There’s another not uncommon theory on Wall Street that I’ve heard this week: If Larry really had a positive economic view of these businesses, he would have ponied up the additional $5 billion or so needed to take PSKY fully private, rather than leaving a small (30 percent or so) float out there. If he wasn’t willing to do that, the thinking goes, why would he step up for the $50 billion—or even $40 billion, assuming another $10 billion could come from the Wall Street wiseguys? Their answer? He wouldn’t, and won’t.

I actually see the logic of leaving the PSKY equity stub out there: It gives the Ellisons an equity currency for future deals, such as the Free Press deal, which my partner Dylan Byers noted is imminently closing. Also, for what it’s worth, I don’t really think the Ellisons care about the extra cost of being a public company.

It’s all about capital allocation, even for Larry, according to another wise media M&A hand. PSKY has already spent $7.7 billion over seven years for rights to broadcast UFC, plus another $1.5 billion over five years to lock up South Park. “They’re going to have to pay up for the NFL, and it looks like sooner rather than later,” he added. “I think that’s going to make the $7.7 billion for UFC look cheap.” The Ellisons, he said, have their hands and their capital committed.

By the way, this is a guy who still thinks, on balance, that the Ellisons will make an offer for WBD, if they haven’t already. But that doesn’t mean he thinks the deal makes sense economically. He noted that Team PSKY has said very little about how the company is performing since they took over. There hasn’t been an investor day, and its first reporting period won’t be until next month. He speculated that there are challenges aplenty within the company as the management team races through the long-delayed integration, yet another reason why the financing for the WBD deal has been slow to come together. “If the Ellisons want to do this, they can do it,” he said. “I’m not saying that it’s going to be cheap for them now. Paying $25 [a share for WBD] makes no sense, really. And then you’re stuck with all those cable channels. And yes, of course, you can put them together with Paramount, but it’s really a lot of brain damage. The one thing about rich people is they like making money.”

Nevertheless, he held out that it was indeed possible that something beyond money was at play here—the great known unknown in all of this. “There’s no planet on which this is an economic deal,” he continued. “Let’s just all be clear here: Even if he does it, this is not an economic deal.” Meanwhile, both stocks were essentially flat this week as the waiting game went on.

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