U.S., EU lawmakers pledge European scrutiny of Paramount's WBD deal

A group of U.S. and European lawmakers told Paramount Skydance CEO David Ellison that the company's proposed acquisition of Warner Bros. Discovery will be subject to careful scrutiny by European regulators and that he should not consider shareholder approval of the deal to be the final word.

The three European Parliament members and two Democratic U.S. House lawmakers issued their warning in a letter sent Thursday and shared exclusively with CNBC.

"In the European Union, the European Commission and the European Parliament will closely examine market definition, market share threshold, customer substitutability, vertical integration effects, and downstream impacts in the Internal Market pursuant to the EU Merger Regulation," they wrote.

The lawmakers noted that despite a preliminary WBD shareholder vote approving the merger last month, it is still subject to scrutiny by their respective governments. And, they warned that the merger could create new barriers to competition.

"We raise particular concern about public statements suggesting that this transaction will face minimal regulatory scrutiny or will likely receive swift approval. Such characterizations appear premature," U.S. Reps. Sam Liccardo, D-Calif, and Deborah Ross, D-N.C., wrote alongside European Parliament members Nathalie Loiseau, Brando Benifei and Andreas Schwab.

Paramount didn't immediately respond to an email seeking comment.

The warning comes a little over a week after Paramount's earnings report, in which Ellison said in a letter to shareholders that "significant progress" was being made toward closing the acquisition by the end of the third quarter.

"From a strategic standpoint, we could not be more excited about the transaction. We are also on track to get this done by September of this year," Ellison said during the company's earnings call.

The combination would bring together powerhouse film studios in Paramount and Warner Bros. as well as two popular streaming services, a deep library of franchise content and a portfolio of TV networks that includes CBS, TNT and CNN.

"This transaction, if not fully compliant with a due authorization process and respecting all applicable legislation, could substantially lessen competition across interconnected markets, including film and television production, content licensing, theatrical distribution, and streaming services," the lawmakers wrote. "It could, thereby reduce consumer choice and increase prices."

The lawmakers also raised concerns about editorial independence. Shortly after Ellison's Skydance acquired Paramount last year, the combined company bought the online publication, "The Free Press," and named its co-founder, Bari Weiss as CBS News' editor-in-chief.

Long-awaited federal approval for Paramount and Skydance's merger came shortly after Paramount paid a $16 million settlement to President Donald Trump over a "60 Minutes" interview with then-Vice President Kamala Harris. As part of the lawsuit, Paramount agreed to hire an ombudsman for CBS News.

"[W]e warn about the impact of this merger on media pluralism, and we call for internal safeguards to guarantee that editorial decision making remains independent of the interests of corporate shareholders, particularly third-country investors," the lawmakers wrote to Ellison.

Paramount has agreed to buy WBD for $31 per share and has offered a $7 billion breakup fee in the event the proposed merger doesn't win regulatory approval.

Funding for the deal includes nearly $24 billion from sovereign wealth funds from Gulf states — in addition to a credit facility and backing by Ellison's father, billionaire Oracle co-founder Larry Ellison.

Paramount previously said those Gulf state entities had agreed to forgo any voting rights in the new company, and the deal isn't expected to trigger a mandatory review by the Committee on Foreign Investment in the U.S., according to a person familiar with the matter.

If there were to be an issue with the foreign investment that would impact the overall deal approval, the Ellison family has backstopped the deal and would be prepared to step in, the person said.

In late April Paramount filed a petition to the Federal Communications Commission for the indirect foreign funding since it is the owner of U.S. broadcast station CBS.

Still, the investment is raising alarm.

"Such financing structures raise serious questions regarding national security, editorial independence, foreign state influence, and the potential for review by the Committee on Foreign Investment in the United States (CFIUS), particularly given the aggregation of sensitive user data and significant media assets under a single corporate owner," the lawmakers wrote in their letter to Ellison. "In the European Union, the presence of foreign sovereign wealth funds may also raise questions regarding the application of the Foreign Subsidies Regulation."

They vowed that the merger will go through a rigorous review process, despite the recent comments of some regulators including U.S. Federal Communications Commission Chair Brendan Carr, who has said he expects the deal to be approved "pretty quickly." Of note, the FCC would not have sole approval over the deal.

"Public trust requires a rigorous and transparent review process. Please consider this letter formal notice that any suggestions the transaction has effectively cleared regulatory hurdles, are false," the lawmakers wrote.