Larry Ellison Owns 40.6% of Oracle and Has Backstopped $40.4 Billion of a Media Deal. Here's Why That's an Oracle Shareholder's Problem.

Larry Ellison owns 1.16 billion shares of Oracle (NYSE: ORCL) through his family trust -- 40.6% of the company, worth about $139 billion at the current share price.

In December, he put a piece of that fortune behind a media deal. Warner Bros. Discovery's board had questioned whether the equity backing Paramount Skydance's all-cash offer was solid, and it wanted more than a trust's balance sheet behind the bid. So Ellison gave an irrevocable personal guarantee covering $40.4 billion of the offer's equity financing, plus any damages claims against Paramount. He also agreed not to revoke the trust, or move assets out of it, while the deal is pending. Paramount published records confirming the trust's Oracle stake and noted that all of the trust's material liabilities are publicly disclosed.

At the time, the guarantee was a show of strength. Today, however, it looks different. The tech company's stock trades near $120 as of this writing, after touching a 52-week low of $114.50 on Tuesday, down about 65% from its high of $345.72. The promise hasn't changed, but the wealth behind it has.

Here's a closer look at what that means for people who own Oracle stock.

Larry Ellison. Image source: Oracle Corporation.

A promise that now runs to 2027

Paramount's pursuit of Warner Bros. Discovery became a signed agreement in February. The price is $31.00 per share in cash, valuing the streaming service and studio owner at $81 billion in equity. The Justice Department cleared the deal in June, and the European Commission approved it on July 22, subject to conditions on film distribution in Europe.

Then, twelve state attorneys general, led by California, sued this month to block the merger, arguing it would harm competition in movies and entertainment. A federal judge froze the transaction while the challenge proceeds.

And on Friday, July 24, Paramount agreed the deal will not close before June 1, 2027, or five days after a ruling on the merits of the case, whichever comes first.

That timeline matters for Oracle shareholders because the guarantee stays open while the case runs -- potentially for almost another year, against a stock that keeps falling. At Oracle's 52-week high, Ellison's stake was worth about $400 billion, and a $40.4 billion promise amounted to a tenth of it. At the current price, the stake is worth about $139 billion, and the same promise is nearly a third.

The collateral question

Whether the guarantee is secured by Oracle shares is not something the public record answers. What the record does show is how much of Ellison's stake is already spoken for.

Oracle's proxy statement, filed in September, disclosed that 346 million of his shares (about 30% of his position) were pledged as collateral securing personal debts, including various lines of credit.

At the current share price, those pledged shares are worth about $40 billion. In other words, the collateral behind Ellison's existing borrowing has shrunk to roughly the size of the new promise he layered on top of it.

Oracle's board, for its part, has said the pledged shares secure personal term loans used to fund outside business ventures, that none of them collateralize margin accounts, and that it believes Ellison can repay without selling a share. But that assessment was published in September, before the guarantee existed.

And if the deal closes, the $40.4 billion has to fund. Nobody outside Ellison's circle knows exactly how. His fortune, though, is concentrated in the trust's Oracle stake, and the obvious routes are borrowing against more shares or selling some. Either way, more of the company's stock could end up tied to one man's media ambitions.

Most proxy statements don't need a section on the founder's personal borrowing. Oracle's has one, and it gets more relevant every quarter.

To be fair, the guarantee doesn't touch Oracle's operations. Demand for the company's cloud computing capacity will decide the business's future, not a Hollywood courtroom.

The same goes for its enormous bet on artificial intelligence (AI) infrastructure. Next to those forces, the founder's personal balance sheet is a side story.

At about 14 times forward earnings, the market has arguably discounted plenty already. But a cheap multiple usually comes with an explanation attached, and this one carries several. The Ellison guarantee is the piece shareholders can do the least about: a claim on the controlling stockholder's wealth, sized at nearly a third of his stake, waiting on a lawsuit with a 2027 outside date. Personally, I'd want the courtroom resolved, and the funding plan for that $40.4 billion made public before treating the discount as an opportunity.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle and Warner Bros. Discovery. The Motley Fool has a disclosure policy.