The Paramount-Warner Bros. Discovery saga has more than its share of twists and turns, but one of the most unusual aspects of the deal is the ticking fee, which adds an element of pressure to its legal proceedings with 12 state attorneys general.
The fee represents a ticking time bomb that forces Paramount to close its deal to buy Warner Bros. Discovery by Sept. 30, or face stiff financial penalties. David Ellison’s company could be on the hook for a fee of 25 cents per share for every quarter the deal isn’t closed beyond that date. That translates to roughly $650 million per quarter, or approximately $7 million per day.
And now that the deal is on pause due to the states’ lawsuit, that fee is top of mind for Paramount.
But how does the ticking fee work and how common is this practice? TheWrap unpacks everything you need to know below. A Paramount spokesperson declined to comment on this story.
What is a ticking fee?
A ticking fee is paid by a buyer to a seller to motivate the parties to close a deal faster and to compensate shareholders in case of any delays.
In the specific case of Paramount, CEO Ellison used it in an effort to sweeten its bid for the entire company as it was looking to thwart an $83 billion deal between Netflix and WBD for the latter’s streaming and studio assets. When excluding the ticking fee, Warner Bros. Discovery shareholders are set to receive $31 per share in cash for all of the shares of common stock that they own.
“The length of time between the deal being announced and the deal being closed matters for your return on investment as a shareholder, given your preferences and other alternatives. You’d usually want to receive $20 today rather than in a year because presumably you can invest it elsewhere and make a return on your investment over the year,” Paul Nary, an M&A and corporate strategy professor at University of Pennsylvania’s Wharton School of Management, told TheWrap. “In this case, since the cash price per share is fixed, the longer the process takes, the less the overall return for WBD shareholders.”
How common is a ticking fee?
The use of ticking fees are rare in M&A deals, according to regulatory attorney Braden Perry, who told TheWrap that they show up only when both sides “expect a long regulatory war.”
“A ticking fee is a confidence signal that doubles as an admission of risk,” he said.
Two examples are Standard General’s attempt to acquire Tegna and JetBlue’s attempt to acquire Spirit Airlines in 2022. The former offered a ticking fee that ranged from as little as $0.05 per share to as high as $1.25 per month depending on how long it took to close its deal, while the later made a ticking fee prepayment of $0.10 per share per month between January 2023 and the consummation or termination of its merger.
Notably, neither of these deals ended up closing. The latter ended up paying out over $400 million before a court killed the deal.
When does the ticking fee take effect?
The ticking fee in the Paramount-Warner Bros. merger officially takes effect if the deal doesn’t close by the end of the third quarter, or Sept. 30. The fee will start accumulating on Oct. 1.
How big is the fee?
Per the terms of the agreement, the ticking fee is an amount in cash equal to $0.00277778 multiplied by the number of calendar days elapsed after the Sept. 30 deadline to and including the closing date.
That figure will not exceed 25 cents per quarter, which would translate to roughly $650 million. When breaking that down, that’s a daily ticking fee of around $7 million over the course of each 90-day period.
Does Paramount have to pay daily?
No. While the ticking fee is measured on a daily basis, the total accumulated sum would be added to the $31-per-share amount and would be paid out to shareholders at the effective closing date and funded through the equity and debt commitments backing the deal.
How does the temporary restraining order play into this?
On Monday, Judge Araceli Martinez-Olguín granted a temporary restraining order that would pause the merger from closing for 14 days, with an option for an additional 14-day extension.
While Martinez-Olguin said Paramount will suffer “no apparent harm in the near term,” she has set a preliminary injunction hearing for Aug. 3 at 3 p.m. PT.
Because the hearing is set for Aug. 3, still more than a month before the deadline, the TRO isn’t a factor in the ticking fee. But Paramount still tried to argue that this could harm its business — an argument Martinez-Olguín didn’t buy.
“Even if Defendants argued that they would suffer economic harm as a result of delaying the merger, the equities do not weigh in their favor when contrasted with the potential public harms that would result from consummation of the Transaction, including the loss of competition,” Martinez-Olguin wrote in her ruling. “Paramount and Warner Bros. will continue to operate as separate, viable companies competing in the marketplace while they wait for the court to adjudicate this case. The balance of equities, combined with the public’s vital interest in antitrust enforcement, therefore tips sharply in favor of the requested injunctive relief.”
However, if the state AGs are granted a preliminary injunction, then Paramount would face the prospect of paying that fee since the deal could be put on hold for months.
Per the terms of the merger, the outside date is March 4, 2027, though it includes an automatic one-time extension that would push back the deal’s deadline to June 4, 2027 if all closing conditions except for regulatory approvals and governmental orders have been satisfied or waived.
Could Paramount reduce or eliminate the ticking fee?
While Paramount is legally on the hook to compensate shareholders for the delay, it does technically have the option of trying to amend the terms of the deal, including the ticking fee, experts told TheWrap. But that would require mutual agreement through a renegotiation with Warner Bros. Discovery and could invite shareholder lawsuits.
Perry said that an attempt to eliminate the ticking fee outright would be “dead on arrival,” noting that it is money in the pockets of WBD shareholders who voted to approve the deal in April.
“The WBD board has a fiduciary duty to those shareholders, and agreeing to strip out $650 million a quarter would invite immediate litigation,” he continued. “WBD has no reason to give it up, and Paramount has no leverage to demand it. Paramount put the fee in the deal to win the bidding war against Netflix. It was a confidence play, and now Paramount owns it.”
As for reducing it, Corey Martin, managing partner of Granderson Des. Rochers LLP’s entertainment finance practice, added that Paramount would need to “offer meaningful consideration in exchange for any reduction.”
“They would have to financially compensate the WBD shareholders either way,” he said.
Even if Paramount wanted to reduce the ticking fee, entertainment litigation attorney and business trial lawyer Jordan Matthews told TheWrap it’s unlikely they would try to do it before the Aug. 3 preliminary injunction hearing.
“If Paramount did, then it would completely undermine its argument that granting a preliminary injunction will cause it to suffer undue hardship if the injunction is granted,” Matthews said.
How long can this last?
The prospect of having to pay $650 million in ticking fees per quarter, on top of the legal costs of dealing with multiple lawsuits, can add up pretty quickly. But Paramount’s attorney Jeffrey Kessler has indicated that the company would appeal a preliminary injunction and is willing to take its fight all the way to the Supreme Court, which could drag the dispute out for months and delay the merger closing to 2027.
“I have no idea where the exact pain point is for the Ellisons and the other investors, but anything beyond $1 billion+ becomes at least somewhat material,” Nary said. “But then again, given they managed to snatch WBD for $31 per share when everyone expected more like $32 to $33 per share, maybe they can allow themselves more room here.”
Perry noted that the ticking fee is about 0.6% of the $110 billion deal value per quarter and that the Ellison family and its backers have deep capital behind the bid. It’s also worth noting that Paramount would be on the hook to pay WBD a $7 billion break-up fee if the deal does not close at all due to regulatory matters.
“At $650 million per quarter, Paramount would need almost eleven quarters of ticking fees before delay costs matched the regulatory failure payout. So the rational move for Paramount is to litigate hard, absorb the fee if it must, and push for the fastest possible resolution,” Perry said. “Where it bites is on settlement pressure. If the states can drag this into two or three quarters of fees, expect Paramount to get very generous with commitments on film output, jobs, and pricing. My read is that one quarter is an annoyance, two quarters is real money and three or more forces a settlement conversation.”
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