Paramount Skydance on Monday reached a settlement with California and 11 other state attorneys general that sued to block its merger with Warner Bros. Discovery, paving the way for completion as it resolves a major antitrust legal challenge against the $110 billion mega media deal.
Bloomberg first reported a settlement, followed by widespread media coverage and a statement from California Attorney General Rob Bonta that laid out terms and remedies Paramount committed to as part of the agreement to resolve competition concerns brought on by the coalition of states.
The Department of Justice had signed off on the deal in June, but in July the 12-state coalition led by California filed an antitrust lawsuit to block Paramount’s Warner Bros. deal, arguing it would harm competition by lowering theatrical outputs and raising prices, which they contended would hurt both Hollywood workers and consumers. Other states joining the suit and settlement include Arizona, Colorado, Connecticut, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, Oregon, and Washington.
The marriage of Paramount and WBD brings together two major legacy media companies with combined assets spanning linear TV like CBS, MTV, Nickelodeon and CNN, HBO, TBS, TNT as well as film and TV studios, and streaming and digital properties such as Paramount+, Pluto TV and HBO Max, among others.
“Today, we have secured a settlement that resolves our antitrust concerns of the Warner Bros./Paramount merger — concerns that the merger will lower output and increase prices — by guaranteeing massive investment in domestic film production and providing enforceable guardrails to help keep cable prices competitive,” said California AG Bonta in a statement.
Specifically, as part of the settlement to help resolve states’ concerns over the film industry, Paramount agreed to a five-year court enforceable commitment to increase film output from the merged company. That includes 30 films per year (including 20 wide releases) in the first two years and 32 films per year (including 21 wide releases) in years three, four and five post-merger. Paramount also committed to releasing at least four independent films in each of the five years.
If Paramount fails to hold up its end of the bargain in any year, the company will be required to divest Miramax Studios and pay $30 million per missed film toward the healthcare and retirement trust funds associated with the WGA, International Alliance of Theatrical Stage Employees (IATSE), Directors Guild of America (DGA), International Brotherhood of Teamsters (IBT) and other unions and to the National Association of Attorneys General for more antitrust enforcement.
Additionally, Paramount agreed to boost the merged company’s U.S. film production and spend by at least $1.5 billion over five years above its 2025 U.S. spending levels.
There are also implications if a federal film tax credit of at least 20% is passed, in which case Paramount would need to increase U.S. film production to 20% (up from its current 5%) in years one and two and up it to at least 30% in the remaining years. If more expansive film tax credits are also passed in California or New York, then investment would need to increase to at least 40% of all film production happening in the U.S.
As a merged company Paramount also agreed to form and operate an independent film fund, contributing $5 million per year for a total of $25 million. The agreement also includes a $47.5 million fund for workers who are impacted by the merger. And notably there are restrictions requiring Paramount to conduct negotiations for its basic cable channels independently from that of Warner Bros. for five years to preserve the existing competitive dynamic between the companies.
Still, Bonta’s statement emphasized the settlement “is not a vote of support for this merger” but acknowledged it resolves states’ antitrust concerns in every market, while protecting competition and consumer choice.
“When we get down to brass tacks, what we heard over and over from people who would be most directly and immediately impacted by the merger is that what matters most is consistent film output, domestic production, and protecting the livelihoods of workers above and below the line,” Bonta continued. “As such, our settlement provides court-enforceable commitments for more films, an infusion of an additional $1.5 billion into home-grown film production, and protections for workers who are impacted by the merger. There’s no Hollywood without the people who work on and off screen to make the magic happen, and today’s settlement protects workers, jobs, and Hollywood.”
The DGA also weighed in with positive sentiment on the theatrical output commitments.
“We congratulate the parties on reaching an agreement that addresses a number of critical concerns related to the Paramount/WBD merger. The AG agreement contains important binding and enforceable commitments that protect theatrical film and television markets and domestic film jobs,” said Directors Guild of America National Executive Director Russell Hollander in a statement. “Equally important, it brings clarity and stability to the industry during a period of decreased production."
The agreement comes after a bit of turbulent ride, including Paramount leaders threatening to move the company out of California. It also comes after a relentless pursuit by Paramount for WBD that started last year and culminated in March with an agreement for all of Warner Bros that bested Netflix, which bowed out after the SVOD giant had initially been named the winning bidder for the company’s studio and streaming businesses last December.
Where does this leave Paramount?
As for where the settlement leaves Paramount, with its deal poised to close imminently, Wolfe Research equity analyst Peter Supino on Tuesday wrote that the company shifts “from a declining linear TV portfolio and subscale studio & streamer into a film and TV behemoth whose increasingly relevant streaming portfolio must race against the declines if its increasingly irrelevant cable network portfolios” – while noting this may sound familiar because it’s the same challenge WBD faced.
“Fortunately, today’s linear TV decline is slower, and the newco’s streaming offering is compelling,” wrote Supino in a Sept. 22 note to investors.
Among the antitrust remedies agreed to, Supino called out the commitment to maintain Paramount and WBD Los Angeles production lots, “which removes a path to modestly trim leverage through real estate.”
For its stock, the analyst told investors that Paramount Skydance upside depends on a mixture of $6 billion of cost synergies, strong studio output “and compounding double-digit streaming revenue growth without spending too much to achieve it.”
Supino noted that after Paramount stock initially rose approximately 11% on news of the settlement, it ended Monday down 2.9%, which the analyst believes reflects “the settlement deal’s stringent terms which limit the combined co.’s flexibility to cut costs, negotiate collectively, and pay down debt.”
Still, reaching an agreement with the states before Oct. 1 also means Paramount won’t be obligated to pay Warner Bros. a late fee of $7 million per day, which it would’ve started to owe at the beginning of next month if the deal hadn’t closed by then. A trial in the lawsuit had been set for March.