Rivals eye options as bidding war for Warner Bros escalates
Pressure mounts for Netflix and Paramount as hostile battle could push deal price higher than expected
David Zaslav stunned Hollywood and Wall Street when the Warner Bros Discovery chief signalled the sale of his company would cost $30 a share — more than triple its stock price for most of this year.
Now the consummate dealmaker’s intimations look prescient. WBD has become the prize in one of Hollywood’s fiercest bidding wars, with Paramount gatecrashing a deal reached with Netflix a week ago and potentially pushing the eventual price well beyond Zaslav’s once-mocked target.
WBD’s shareholders expect Paramount to bump up its existing $30 per share offer, which values the whole company including debt at $108bn. And Paramount chief executive David Ellison made clear that the bidding could go higher, disclosing in a regulatory filing on Monday that his offer was not the “best and final”.
“I thought the final episode of the streaming series was last week. Now it appears we have been picked up for another season,” said a person in the Warner camp. “The fact that we are now talking about a deal in the high 20s, or even low 30s, is pretty amazing compared with 18 months ago.”
A lot will depend on what WBD says by December 22, the deadline to address Paramount’s proposal.
WBD’s board could opt to stick with the agreed Netflix offer, which only covers the studio and streaming assets — at a valuation of $27.75 in cash and stock. The board’s choice could depend on how it values the traditional television assets — CNN and the other cable networks — that would be left behind with shareholders if the Netflix deal proceeds.
An optimistic reading by a Bank of America analyst in September valued those channels at roughly $5 a share, which would make Netflix’s offer appear stronger relative to Paramount’s. But Paramount argues the true value of the declining TV networks at closer to $1 a share, changing the arithmetic.
If Paramount continues with its tender strategy and a substantial number of WBD shareholders support Ellison’s bid, the pressure on WBD’s board to engage would intensify. Analysts at CreditSights expect that if talks resume, Paramount could lift its bid to about $32 a share, a level that may test Netflix’s willingness to counter.
Raising its bid to $32 a share could require Paramount to raise more capital, and potentially having to ask its Middle East sovereign wealth fund backers to increase their equity contribution from the existing $24bn.
Alternatively, Larry Ellison, David’s billionaire father and Oracle founder, could put more cash on the table, given the family trust is backstopping the entire $41bn equity package. Even after Oracle’s stock dropped about 10.8 per cent on Thursday, the trust still holds roughly $225bn, leaving ample room to add firepower.
It is unclear whether Netflix — whose market value has fallen roughly 20 per cent, or about $100bn, since its interest in WBD leaked in September — has any appetite to escalate.
WBD’s advisers have said “cash is king”, meaning investors would expect Netflix to convert its partly stock bid into an all-cash offer. Doing so would risk Netflix losing its investment-grade rating as it would have to raise the $59bn in debt it has taken on.
Netflix now finds itself in a strategic bind. By pursuing WBD in the first place, it sent a message to investors that it needs the deal to maintain long-term growth momentum, putting pressure on chief executive Ted Sarandos to keep bidding and avoid looking as though Netflix blinked.
Yet a sweetened Paramount bid would also provide Netflix with a graceful exit: the company could claim it admired the assets but refused to overspend. Such a move would spare it a long and potentially risky regulatory review, while also collecting a $2.8bn termination fee.
One banker who has worked on multiple hostile transactions said there was a scenario in which all parties walk away with something: Paramount raises its bid modestly, Netflix bows out, and the combined Paramount-WBD agrees to supply Netflix with exclusive content for a predefined period — allowing both sides to declare victory in a battle neither can afford to lose.