Now, on to WBD…

I’m beginning to think the only logical explanation for all the recent sturm und drang from Paramount Skydance is that Larry Ellison must have told his son David that he’s momentarily tapped out. Perhaps the world’s fifth-richest man, with a fortune currently estimated at around $245 billion, has had the hard conversation with his beloved progeny that the $40 billion in equity he has so far underwritten to acquire Warner Bros. Discovery is all he’s willing to do—for now, at least.

Yes, the Ellisons and Paramount Skydance have made some gestures to sweeten their $30-per-share, $108 billion offer, such as having Larry personally guarantee the $40 billion in the event that the other equity partners crap out, and removing the cap on potential damages. Otherwise, though, the nonfinancial tactics have amounted only to sound and fury. The hostile tender offer—along with that big, old-school ad in The Wall Street Journal—was meaningless given the condition that a PSKY–WBD merger agreement is a prerequisite for the tender offer to be effective—which, of course, would require WBD to conclude that PSKY had offered a “superior proposal” and to renounce its merger agreement with Netflix, which is unlikely to happen absent an increased bid from the Ellisons.

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Instead, Paramount sued Warners in Delaware, requesting that Judge Morgan Zurn expedite the case and require the target company to provide more public disclosure about how it arrived at its valuation for Global Networks, which the WBD board chairman has pegged at between $3 and $5 a share and PSKY has valued at between $0 and $1.40 per share, depending on the week. (WBD itself is likely valuing Global Networks closer to $2.50 a share.)

But Judge Zurn was having none of it. She declined to expedite the case—since nothing is actually happening quickly—and seemed to question whether PSKY even had standing to compel WBD to provide more disclosure about its valuation of Global Networks. Yes, PSKY probably owns some WBD stock at this point, which gives it standing as a shareholder. But it’s not as if PSKY needs information about Global Networks to decide whether to tender its own shares.

Meanwhile, Paramount Skydance’s quixotic attempt to get some seats on the WBD board through a proxy contest is an even longer putt. First, even if PSKY succeeded in getting a few seats, it wouldn’t realistically get a majority. And there’s no guarantee those handpicked new directors would even support the PSKY deal. At that point, even they would owe a fiduciary responsibility to WBD shareholders—not to PSKY. (Those familiar with the Air Products vs. Airgas saga will recall that, back in 2010, Air Products got three seats on the Airgas board as part of its hostile effort to acquire the company, including the use of a proxy contest. But the new Airgas directors ended up voting against the Air Products hostile bid, and the deal eventually fell apart.)

In any event, the timing is way off: WBD’s proxy statement for the Netflix deal will probably be filed in late spring. If Netflix changes its bid to all cash, the proxy statement could be filed sooner, since cash bids require less disclosure. Either way, it seems, the shareholder meeting for the Netflix deal would take place before the WBD annual meeting, where shareholders would vote on PSKY’s director slate. (Last year, the annual meeting was on June 2. It could be in July this year without raising any eyebrows.) Once shareholders vote, that’s it—making a proxy fight for board seats pretty much a moot point, as well.

No, at this point, the only thing that will get the WBD board’s attention is more of Larry’s money. Without it, I don’t see how the board can change its recommendation away from its signed merger agreement with Netflix. “I think they must understand they’re not getting this company on these terms,” explained one person close to WBD. “They’re just not. It’s not going to happen.” Or as another person on the WBD side of the equation put it, “Our guys are laughing at [David]. Like, if you want the company, then just go down to Florida and ask your father for more money.”

This week, Ellison and his RedBird partner Gerry Cardinale were in Europe trying to sow doubt among E.U. regulators about the prospects for the Netflix deal. I know their sense is that the European Union will never go for a combined Netflix–WBD—which, in PSKY’s view, is yet another reason why the WBD board should abandon the Netflix deal and take their offer. The E.U., apparently, has had it with American technology companies, and European movie theater owners don’t like Netflix for obvious reasons. “There’s no way they’re getting regulatory approval in Europe,” someone close to PSKY told me about the WBD–Netflix deal.

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Maybe. The counterargument is that both WBD and Netflix have sophisticated regulatory counsel and have obviously thought this through. Why in the world would WBD sign a deal with Netflix if there were a major risk that the E.U. would reject the deal 18 months from now? For that matter, why would Netflix agree to pay WBD $5.8 billion if regulators were likely to reject the deal? Sure, that’s not Ellison money, but it’s not nothing either. (Usual disclosure: Through a recent transaction, WBD C.E.O. David Zaslav is a de minimis investor in Puck; RedBird is a minority shareholder.)

Even if European or American regulators reject the WBD–Netflix deal, how does that help PSKY now? The company, which is well-advised by Blair Effron, at Centerview Partners, and Faiza Saeed, at Cravath, is facing pressure beyond Larry Ellison’s apparent decision to cap his equity contribution. To wit: PSKY needs WBD’s Global Networks unit, which WBD plans to spin out in the third quarter under the leadership of Gunnar Wiedenfels, more than it cares to admit—in particular the “synergies” from combining the business with its own fading linear assets to pay down the mountain of debt that PSKY would incur to do the WBD deal. “Paramount needs Discovery Global’s more than $5 billion of EBITDA to make the PSKY+WBD leverage math presynergy achievable at closing,” LightShed’s Rich Greenfield wrote in a note on Friday. “Without the earnings from Discovery Global, PSKY+WBD leverage would be pushing 9x.”

By the time the E.U. weighs in, Global Networks will have already been spun off, and Zaz’s Streaming and Studios will also be an independent company. If Netflix is rejected at that point, there’s no guarantee the WBD board would pivot to a PSKY deal for Streaming and Studios—and why would PSKY want Streaming and Studios without Global Networks? It wouldn’t, and obviously doesn’t. My bet is that WBD would just remain independent at that point. No way Zaz would want to sell it for a bargain price; he’d rather continue to be a Hollywood mogul, even if that means deferring the $600 million or so he’d pocket upon a change of control.

Greenfield gets what’s going on here. “Put simply,” he wrote, “Paramount must convince investors that Discovery Global is worthless to scare them into not wanting to split Warner Bros. Discovery up and take their bid for the whole company. This explains why Paramount launched their tender offer, where you cannot actually tender your shares yet, sued the WBD Board to force greater disclosure around Discovery Global, and is set to run a proxy fight to replace the WBD Board. They must stop the Discovery Global spinoff. Meanwhile, the WBD Board views the split as critical as it enables them to create a more attractive Warner Bros. and HBO asset, regardless of whether the Netflix deal closes, and it enables them to pursue strategic alternatives for Discovery Global sooner rather than later.”

That’s why Greenfield takes it all one step further: “The more we think about Paramount’s bid, the more we think it is a mistake,” he wrote on Friday. “The Ellisons should abandon their efforts to buy Warner Bros. Discovery and dramatically ramp up their investment in internally produced content and third-party licensing.” Absent David heading to Florida, hat in hand, that’s looking more and more like how this is going to go down.

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