Paramount is selling equity at $12 while its shares trade at $10.18

Paramount Skydance shares closed at $10.18 on Thursday. The investors funding its takeover of Warner Bros. Discovery will pay no less than $12.00 for the same stock, because that floor is written into the subscription agreements. Across the full amount committed, about $46.95bn, the difference is roughly $7.1bn of value that evaporates on the day the shares are issued.

That is the structure Elon Musk has reportedly been discussed for.

Semafor reported on Wednesday that Paramount executives have talked about asking Musk to join a syndicate of equity investors in the company, one name among several wealthy individuals that chairman and chief executive David Ellison has considered approaching. The size of any investment could not be determined. Paramount declined to comment and Musk did not return a request for comment, according to Semafor. Deadline picked the report up.

What the filings say the shares cost

The mechanism is set out in Paramount's own quarterly report, filed with the SEC on 4 August. The Lawrence J. Ellison Revocable Trust subscribed for up to $46.7bn of new Class B stock, with $250m from RedBird Capital Partners Fund IV. In April the two assigned those subscription rights to a group of institutional investors: Saudi Arabia's Public Investment Fund, the Abu Dhabi sovereign vehicle L'Imad 1st SPV 2, the Qatar Investment Authority's QIA TMT Holding, LionTree Investment Fund, and affiliates of the Ellison parties and RedBird. The allocations, the filing says, total the full amount of the commitments.

What each of them pays is the Syndication Purchase Price: the 20-trading-day volume-weighted average price of Paramount Class B stock, struck three business days before the merger closes, "subject to a ceiling of $16.02 per share and a floor of $12.00 per share".

The ceiling is decoration. On Yahoo Finance's daily prices and volumes for the 20 sessions to Thursday, the volume-weighted average comes out at about $10.50. The floor is the price.

Divide $46.95bn by $12.00 and Paramount issues 3.91bn new Class B shares. At Thursday's close those shares are worth $39.8bn. The company had 1.09bn Class B shares and 31.5m Class A shares outstanding on 31 July, which means the new issue is roughly three and a half times the existing company, and everyone holding Paramount stock today is left with about 22% of it.

Had the stock been at the ceiling, the same money would have bought 2.93bn shares. The floor prints a third more paper for it.

A sovereign fund that signed in April is committed and has to live with the number. Anyone approached in September is being invited to pay 18% over the market for non-voting stock, which is a price you accept for reasons other than the price. That narrows the list to people with a relationship, which is roughly what the reporting describes. Larry Ellison put $1bn into Musk's purchase of Twitter in 2022.

The guarantee is bigger than the figure being quoted

Most of this week's coverage has described Larry Ellison as having personally guaranteed "more than $40 billion" of the equity. That number is nine months old. It comes from 22 December, when Paramount was bidding $30 a share in a hostile offer and CNN and Fortune reported an irrevocable personal guarantee of $40.4bn.

The definitive agreement is dearer. Warner Bros. Discovery's quarterly report states that Ellison and his trust guarantee certain payments by Paramount "including $45.72 billion of the aggregate Merger Consideration". On 2,510,703,314 Warner shares at $31.00, the consideration is $77.8bn. One man has guaranteed 59% of it.

The clock, in cash

From Thursday next week the price starts moving on its own. Both companies' filings put the ticking fee at $0.00277778 per Warner share for each day after 30 September that the merger has not closed, capped at $0.25 per share per 90 days. On the share count in Warner's filing, that is $6.97m a day, or $627.7m a quarter. We put the figure at $7m a day on 10 September, before anyone was counting the days.

Annualise it and the fee is $1.01 a share against a $31.00 price. Call it 3.3% a year.

Paramount's own pro forma accounts assume 7.00% on the new permanent financing it is raising for this deal, and about 5.94% on its term A loans. The fee for being late is less than half the cost of the money being borrowed to be on time. It does not even land on the operating company: the Ellison trust's subscription rises to cover the ticking consideration, which is the tidiest detail in the whole structure.

So the clock is real, and it is not what is making anybody hurry.

What is actually holding it up

A judge is. California attorney general Rob Bonta announced on Monday that 12 states had settled the antitrust suit blocking the deal, on terms including an extra $300m a year of American film production for five years, a floor of 30 theatrical releases a year, a five-year bar on selling the Paramount and Warner Bros. lots, and an independent board overseeing CNN and CBS News. We wrote on Sunday about what that 30-film promise means against what the two studios actually release.

The consent decree still needs a court. At a hearing on Thursday, US district judge Araceli Martínez-Olguín declined to approve it and told the parties to respond to objections filed by Senator Cory Booker, The Desk reported, with responses due at noon Pacific time on Monday. "The court isn't a rubber stamp of your agreement," she said. David Zaslav has told Warner staff the merger is expected to close no later than early October.

The rest of the money

Paramount spent Thursday raising the debt regardless. Reuters reported that it launched syndication of a $7.5bn senior secured term loan and intends to raise about $44.4bn of further secured debt, leaving the combined company with roughly $80bn of it. Variety carried the same figures.

Warner shares closed at $30.84 on Thursday, 16 cents below the offer. The market thinks this closes. It is the equity side, not the debt side, where somebody is being asked to pay more than the thing is worth.

Responses to the judge are due at noon Pacific on Monday. The fee starts running on 1 October, at $6.97m a day.