Merger arbitrageurs, often referred to as "arbs," are increasingly wagering that David Ellison, CEO of Skydance, will reach a settlement with California Attorney General Rob Bonta regarding the proposed merger with Paramount. These professional traders, who base their decisions on reliable information, are focused on the potential outcomes of mergers and the challenges they may face from investors or regulators.
The arbs' confidence in a settlement has grown in recent weeks, leading them to bid up shares of the target company, Warner Bros. Discovery (WBD), to levels near those seen when the deal was initially announced. Ellison's offer reportedly stands at approximately $81 billion, or $31 per share, for WBD. The stock had risen to around $30 per share pending regulatory approvals.
Previously, antitrust authorities under the Trump administration did not identify monopolistic concerns in the proposed merger of two companies facing industry-wide challenges such as cord-cutting and a struggling movie attendance rate, exacerbated by competition from major technology firms. These deals had also received approval from overseas antitrust regulators.
However, the situation shifted when Attorney General Bonta, along with other state attorneys general, filed a lawsuit. Between Bonta's initial remarks and the lawsuit's filing, WBD shares declined by over 16%, reaching approximately $25. The source of this decline was attributed to Bonta's apparent rejection of settlement offers from Ellison, whose legal team reportedly expressed doubts about winning the case before a federal judge perceived as potentially unfavorable to the merger. Bonta's stated desire for significant structural changes to the deal also complicated matters, potentially undermining the merger's core objectives.
This uncertainty caused WBD shares to fluctuate. However, the stock began to recover after Ellison indicated a willingness to relocate Skydance out of California, potentially moving thousands of jobs to Nashville or Austin, if Bonta did not engage in settlement discussions by October 1. This move appeared to prompt a shift, with some Democratic officials, including Governor Gavin Newsom and Xavier Becerra, advocating for a settlement on terms more favorable to Ellison. Hollywood executives, a significant source of campaign funding for the state Democratic Party, also expressed concerns, recognizing that industry consolidation through such deals is crucial for survival.
As of recent reporting, WBD shares were trading around $28, reflecting the market's expectation of a settlement. Despite this trend, Bonta recently reiterated to CNBC that the antitrust allegations were "black and white" and that any settlement would require "robust structural remedies." This statement caused WBD shares to dip, though not to the extent that it suggested a significant shift in the market's overall sentiment favoring a settlement. The article notes that this stance by Bonta may be politically motivated to appeal to the progressive wing of his party, particularly given David Ellison's father, Larry Ellison, is a co-founder of Oracle and a personal friend of former President Trump. The arbs' cautious approach, reflected in their pricing of WBD shares below $30, indicates ongoing vigilance as the situation develops.