Now back to the Ellisons…

Paramount’s takeover of Warner Bros. Discovery is proving to be one of those deals that just keeps on giving. Now it turns out that back in February, about a week before David Ellison and David Zaslav announced their merger, a mysterious Singaporean entity called Nobelis Capital, Pte., Ltd., appeared out of nowhere with a $32.50-per-share, all-cash bid for all of WBD. From the jump, there were red flags: The Nobelis bid “did not include any evidence of equity or debt financing, nor a definitive transaction agreement,” according to a revised WBD proxy filed on March 16. What’s more, nobody on Wall Street seemed to have heard of them. And when WBD took the time to try to figure out if they were legit, it came up empty too. “We assumed it wasn’t real based on several factors,” a WBD spokesman told me, before pointing to the recently filed proxy statement.

The proposal claimed that Nobelis had deposited $7.5 billion in a JPMorgan Chase escrow account “to cover the regulatory termination fee” and another $10 billion into an HSBC escrow account to cover the $2.6 billion Netflix breakup fee, among other expenses. WBD’s advisors proceeded to investigate the legitimacy of Nobelis—but, according to the proxy, “were unable to verify that Nobelis owned or controlled any material assets, and could not find the purported deposit at J.P. Morgan.” The investment banker that Nobelis claimed to be working with told WBD he had no knowledge of the company and was not involved with its purported bid. Naturally, WBD took “no further action” with regard to the Nobelis proposal.

Whatever its origins, the curveball from the Far East had arrived at the very peak of Warners deal heat, on February 18—just after Netflix had signed the waiver agreement that gave PSKY until midnight on February 23 to try to negotiate a “superior” deal. During that time, according to the revised proxy statement, a flurry of activity took place. Debevoise, on behalf of WBD, sent PSKY a letter outlining the “key issues” that the Ellisons would need to address—including the requirement that Larry put up even more equity at closing if the banks providing the debt financing threatened to walk away. Naturally, all of these documents were also sent to Netflix, presumably so Ted and Reed could follow along.

On the evening of February 21, David Ellison called David Zaslav and told him that PSKY would send over revised drafts of a merger agreement which, Ellison claimed, “met substantially all of the concerns raised by WBD.” The new PSKY proposal upped the consideration to $31 a share in cash and increased the regulatory termination fee payable to WBD to $7 billion, among other things. Over the next two days, PSKY and WBD advisors went back and forth on revisions. But when the WBD brain trust met on February 23, just before the midnight deadline to make a decision, the board decided not to take any action beyond authorizing its advisors to keep the discussions alive.

Shouldn’t that have been it for PSKY? Apparently not. The very next day, the WBD board met again, and after hearing all the improvements that PSKY had made, determined that their revised bid might reasonably result in a “superior proposal” after all. If they didn’t at least discuss PSKY’s counter, they might be in breach of their fiduciary duties. The board quickly authorized Zaz to call David Ellison to see if he could sweeten the deal. Meanwhile, Debevoise let Netflix know that the WBD board was seeking a more open relationship.

In the end, Zaz wasn’t able to get more money—as Ellison correctly pointed out, $31 a share was “full and fair value”—especially given that Netflix hadn’t raised its bid. On February 26, Cravath placed into escrow signed execution pages for all the various documents, implying that PSKY was ready to go. And a few hours later, the WBD board approved the revised PSKY bid—giving Netflix one last chance to renegotiate. But by this point, Netflix had clearly decided it was out. Enough was enough for Ted and Reed. All that was left was for PSKY to pay Netflix its $2.8 billion breakup fee. The very next day, WBD signed the documents sealing the deal, and a new Hollywood was born.

Meanwhile, Nobelis Capital hadn’t gone away. On March 8, the company (or whatever it is) sent a letter to WBD threatening legal action unless WBD entered into a “settlement framework” with Nobelis within 48 hours. This framework, Nobelis argued, would require WBD to disclose the Nobelis bid, give Nobelis access to certain financial information, and—wait for it—pay Nobelis a termination fee equal to 3.5 percent of the deal. The chutzpah didn’t end there. Nobelis also requested compensation for whatever fees it had ostensibly racked up when placing $10 billion into the HSBC account, if such an account even existed.

So far, of course, no lawsuit has been forthcoming. “WBD took no further action with respect to the Nobelis communication, and WBD has received no further communication from Nobelis as of the date of this proxy statement,” WBD noted on March 16. Alas, not just anyone gets to become a breakup-fee billionaire. Although you’ve got to give Nobelis points for trying.

Meanwhile, the latest proxy statement also provides new details on the Zaslav golden parachute. We all know now that Zaz could receive as much as $887 million—or so the headlines have read, without digging deeper—when the sale of WBD to PSKY closes. The bulk of that—$517 million, according to the proxy—comes from the vesting of Zaz’s stock and option agreements. But a new provision was added on March 10 that is very, how shall we say, executive friendly.

The provision appears designed to help Zaz avoid feeling any pain resulting from WBD’s decision to switch teams from Netflix to PSKY. Because the PSKY deal is expected to close later this year, much sooner than the Netflix deal would have closed, Zaz is apparently facing a potential excise tax on the $517 million. As a result, WBD has estimated that it will have to pay another $335 million—it could be a lot less in the end—to cover the excise taxes plus the taxes on the benefit of paying his excise taxes. That’s where the $335 million estimate comes from. That money isn’t going to go to Zaz personally, but it does allow him to not have to be penalized by the excise tax. Instead, a new “tax reimbursement agreement” with the WBD board, signed March 10, will allow WBD to make Zaz whole on the potential excise tax.

Those tax reimbursement payments, by the way, also represent a taxable income benefit to Zaz. So the $335 million includes another income tax reimbursement to Zaz for that first tax reimbursement on the excise taxes. (Yes, it’s circular.)

The payment could end up being much less, however. For instance, according to the proxy, if the PSKY deal were to close in 2027 instead of this year, WBD would not expect to reimburse Zaz because it believes he would not incur the tax. In any case, the estimate of the tax reimbursement is complicated—it’s based on a 20 percent excise tax rate and an estimated effective tax rate of 54.126 percent for Zaz—but the idea behind it is simple. The point is to make Zaz indifferent to the tax, as if it hadn’t happened or wasn’t paid, at least by him. I guess that means he gets his $517 million free of the 20 percent excise tax. He would still be responsible for state and federal income taxes, plus any capital gains taxes based on the payout. (The I.R.S. comes for us all eventually…)

These kinds of arrangements were pretty common in executive pay packages once upon a time, especially for executives involved in mergers. But nowadays they are considered outdated and overly generous. In the trade, for those playing along at home, it’s called a “280G tax gross-up,” referring to a section of the tax code that discusses the excise tax. A more typical arrangement these days would be for Zaz to pay the excise tax himself, or for WBD to reduce the payout to reduce the excise tax, or reclassify some of the payment as compensation rather than stock and option payouts. But I can see why the board and WBD’s tax advisors went this way after it was clear that WBD was going with PSKY as opposed to staying with the Netflix deal, which definitely would not close until 2027, if ever.

Of course, since PSKY is buying WBD, the cost of all this will be borne by the shareholders of the combined PSKY/WBD. So, I think we can safely say this is for Larry’s account, too. “Factors that our compensation committee considered included that the cost of the arrangement would be borne by the surviving corporation after the merger, the view of the outside tax advisors that David was unlikely to have such exposure in a Netflix transaction due to anticipated closing timing and other factors, and David’s commitment to cooperate with reasonable requests to mitigate his exposure to the excise tax,” a WBD spokesman explained to me. Got that?

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