California Vowed to Stop Paramount-Warner Bros. Merger. Why Did It Fold?

For months, California attorney general Rob Bonta told anyone who would listen that Paramount‘s $111 billion bid for Warner Bros. Discovery would ruin Hollywood and that he could stop the merger. Then, when his leverage appeared the highest, the political and economic realities surrounding the showdown became impossible for him ignore.

That pressure came from the top. Gov. Gavin Newsom had expressed concerns about the state’s lawsuit, particularly in relation to employment levels. He had inserted himself into negotiations to encourage a settlement.

“I’m very mindful of what this means to the state — our reputation,” he said at a press appearance last month, adding that he took CEO David Ellison’s threat to move out of California “seriously.”

Indeed, Newsom’s fingerprints were all over the announcement of the settlement. Paramount thanked him “for his support throughout this process.” Read between the lines and the picture comes into focus: Newsom wanted a deal, and Bonta fell in line.

Newsom leaning on Bonta — along with Los Angeles Mayor Karen Bass and gubernatorial nominee Xavier Becerra — put the state’s top prosecutor in an increasingly untenable position. California had sued to stop the merger, but it also faced the prospect of losing Paramount regardless of the outcome of the lawsuit if a deal wasn’t struck ahead of an Oct. 1 deadline when the so-called $7 million-per-day ticking fee starts accruing.

That dynamic offers insight into how a case that once threatened to derail the biggest Hollywood marriage in decades ended with a whimper that stood in stark contrast to the political furor that spun off from it.

This was always the likeliest outcome for the states challenging the deal. The government had signed off on the acquisition, and merger cases are tough to win in court. The states, especially California, were being asked to gamble on a trial whose outcome was far from certain. Still, that didn’t make the terms any less striking.

While the settlement is broad in scope, it doesn’t require any divestitures that are typical of enforcer-friendly deals. Instead, it appears to be a five-year operating agreement imposed through a consent decree.

Under the agreement, Paramount and Warner Bros. must release at least 30 theatrical films a year for the first two years and 32 for the following three, maintain minimum numbers of wide and independent releases and ensure that at least half of the films are produced or jointly produced by the combined company. They must keep 45-day theatrical windows and a 90-day SVOD holdback for qualifying films. A $30 million per film penalty is assessed for missing the annual quota, with divestiture of Paramount’s stake in Miramax in play if the shortfall remains unaddressed.

The company also has to spend an additional $300 million annually on U.S. production (or $1.5 billion above its 2025 baseline over five years). Separately, the Paramount and Warner Bros. studio lots in Los Angeles must remain open and operate for the duration of the decree.

Other notable terms: Keeping Paramount and Warner Bros. basic-cable negotiations separate and creation of a five-member independence board overseeing editorial standards at CBS News and CNN (selected by Paramount). A violation of the former term could see an order forcing the studio to divest from BET, VH1 and Comedy Central, among other channels (blue-chip assets like CNN or New Line Cinema are not on the table in these divestiture scenarios).

If you said the settlement doesn’t go far enough, Bonta would probably agree. “I don’t think these two companies should merge,” he said at Monday’s press conference, titled “Attorney General Bonta Makes Announcement to Keep California Vibrant.”

So why blink now? Here, the timing of the settlement is key. For California, the worst case scenario wasn’t only the merger being allowed to proceed but also Paramount moving its headquarters and hundreds of employees out of California while the case progressed. Call the threat a bluff if you want, but Ellison had been in talks with Tennessee and Texas officials leading up to the deal, with a decision expected at the start of next month. State politicians were clearly rattled as Los Angeles sees historically low filming levels. For Newsom, the departure of one of Hollywood’s most public-facing companies under his tenure as he teases a presidential run would’ve been a particularly unwelcome outcome.

In the end, that risk outweighed a chance to stop the merger. The states certainly had a viable antitrust case, but it was a coin flip. They faced some of the best lawyers in the country too, including antitrust powerhouse Jeffrey Kessler, who most recently secured a landmark win for states suing Live Nation, Beth Wilkinson, who guided Microsoft’s bid to acquire Activision Blizzard across the finish line, and former U.S. Solicitor General Paul Clement, perhaps the most experienced Supreme Court litigator in the country.

On the appeals front, it appears Paramount found sympathetic ears among the justices. The Supreme Court earlier this month told Bonta to respond to a challenge by Iowa and Montana looking to stop the antitrust lawsuit, signaling a potential review of the case that saw the government side with the studio at various points.

Leading up to the settlement, it appears factions within alliance emerged on whether to accept the deal, with New York, Connecticut, Minnesota, Nevada as the holdouts. Ultimately, convincing California proved enough to overcome pushback from some of the other states, which faced the prospect of continuing to pursue the case without the state that would’ve been at the center of the trial.

In a statement, Connecticut Attorney General William Tong expressed concern about the deal. The state “wanted and demanded full divestiture of CNN and CBS News. We wanted to save ethical and independent journalism and news,” he said. “We fought aggressively for that remedy. I am deeply disappointed that we could not do more.”

Newsom also stressed at the press conference last month that Bonta is “not just representing the state of California, he’s also part of this coalition with a dozen other states.”

The WGA’s statement illustrated the complexity navigating incentives and goals from each of the plaintiffs in the alliance while emphasizing the weight of the states’ decision to settle. “As a nonprofit, the WGA must contend with the reality of forging ahead alone, with no backing from government enforcers, with a complex antitrust lawsuit that would cost millions of dollars to pursue through trial,” it said.

So now, Paramount is positioned to acquire Warner Bros. in a deal will create Hollywood’s next media and entertainment colossus. Faced with that reality, the rank-and-file are confronting an uncomfortable question: What good is all the talk about fighting consolidation if the political and economic costs become too high when the moment actually arrives to oppose one of the biggest mergers in industry history?