Paramount (PSKY.US) acquisition of Warner (WBD.US) faces regulatory hurdles! Deal collapse may lead to Oracle founder's family paying $9.8 billion in compensation

According to Zhitong Finance APP, if the Paramount Skydance (PSKY.US) acquisition of Warner Bros. Discovery (WBD.US) ultimately fails, Larry Ellison and his family could face compensation liabilities of $9.8 billion. Paramount Skydance, led by Larry Ellison’s son, David Ellison, previously agreed to pay Warner Bros. Discovery shareholders a $7 billion termination fee if the acquisition fails due to regulatory issues. In February of this year, Paramount Skydance also paid $2.8 billion to Netflix (NFLX.US) to prompt the streaming company to abandon its bid for Warner Bros. Discovery.

Although these fees have been previously reported, details regarding who would ultimately bear the costs and how they would be paid are buried deep within company filings. With Paramount Skydance last week agreeing to extend the deal completion deadline to June of next year, or five days after any litigation preventing the proposed merger is resolved, these potential costs have come under renewed scrutiny. Currently, twelve U.S. states and the Writers Guild of America have filed lawsuits attempting to block the merger.

Expensive Deal Breakup Fees

It is worth noting that, although Paramount Skydance is already carrying a large amount of debt, it does not need to incur additional borrowing to cover these fees. If the Warner Bros. Discovery acquisition ultimately does not go through, Larry Ellison and a family trust will reimburse Paramount Skydance for the $7 billion termination fee and the $2.8 billion paid to Netflix. Ellison agreed to provide a total of $9.8 billion to Paramount Skydance by purchasing newly issued Class B shares of the company at a per-share price of $16.02. Currently, Paramount Skydance shares are trading at about $8 per share.

Ellison is a co-founder of software giant Oracle (ORCL.US) and last year backed his son David’s acquisition of Paramount Skydance. He also agreed to personally guarantee the equity financing portion of the Warner Bros. Discovery transaction to help Paramount Skydance secure the deal. However, Oracle shares, Ellison’s main source of wealth, have been hit this year by market concerns over the company’s spending in the data center sector and the impact of artificial intelligence on its traditional software business. Reportedly, Ellison’s wealth has shrunk by 31% this year, dropping to $163 billion.

According to public filings, Paramount Skydance used cash reserves and new borrowing in February this year to pay Netflix $2.8 billion. If Paramount Skydance ultimately completes the Warner Bros. Discovery acquisition, the Ellison family and its partners—including RedBird Capital and three Middle Eastern sovereign wealth funds—will bear this cost, as these investors are collectively committed to injecting $46.7 billion in new equity financing into Paramount Skydance.

In addition, due to litigation proceedings, if the deal is not completed before October 1, Paramount Skydance will need to pay Warner Bros. Discovery shareholders so-called “ticking fees” starting from October 1, of about $650 million per quarter. If the acquisition is ultimately successful, these delay fees will also be borne by the Ellison family and its partners. However, if the deal fails, Paramount Skydance will not have to pay these ticking fees, and Warner Bros. Discovery will receive the $7 billion deal termination fee.