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Warner Bros Discovery: Netflix vs Paramount — where things stand

It’s been an incredible week stretching from Wall Street to Hollywood, with the battle over the future of Warner Bros Discovery roping in big players from the Middle East and Washington. 

After Netflix sealed an $82.7bn cash-and-stock deal last week to buy the media giant’s studios and streaming platforms, Paramount stormed in on Monday with a $108bn hostile bid for all of WBD’s assets.

DD will catch you up on what promises to be one of the biggest M&A dramas in decades. The jockeying has just begun between the rival bidding groups as they try to convince shareholders, regulators and even the White House that their deal is the best.

The antitrust case 

Paramount chief executive David Ellison met with WBD investors in New York this week to convince them that his company was a better bet than Netflix in the fight to control the Hollywood group.

He has argued Paramount is more likely to receive the blessing of regulators.

But whichever buyer WBD shareholders choose has to be approved by federal competition regulators, and legal experts say both deals would raise antitrust concerns.

A Netflix takeover is likely to be scrutinised over the platform’s dominance in streaming.

Globally, Netflix has 302mn paying subscribers, while WBD has 128mn and Paramount has 79mn. Combining WBD with Netflix would further bolster its position as the biggest global player in streaming — traditionally a major regulatory red flag.

But if regulators recognise platforms such as YouTube and TikTok as competitors to Netflix’s streaming business, its market share looks a lot smaller.

For Paramount, regulators would likely be focused on the combination of two big studios.

Beyond the economic considerations, there are also the preferences of President Donald Trump, who said on Sunday he “would be involved” in the decision over who ultimately buys WBD, with the potential to influence the outcome through the justice department’s antitrust powers.

At first glance, Paramount seems to have the advantage on this front. Ellison is the son of Larry Ellison, the billionaire Oracle founder and Trump ally. And the president’s son-in-law Jared Kushner is among the financial backers for Paramount’s bid.

But Trump met with Netflix chief executive Ted Sarandos at the White House recently and called him a “great person” who has done “one of the greatest jobs in the history of movies”.

On Monday, the president indicated he hadn’t picked a winner. “I know the companies very well . . . but I have to see what percentage of [the] market they have,” he said, adding: “None of them are particularly great friends of mine. I want to do what is right.”

There is also a risk that state attorneys-general jump in, especially if they deem federal scrutiny insufficient. Any deal is also expected to face scrutiny in Brussels.

What’s the better deal for Hollywood?

After the Netflix deal was announced, entertainers and Hollywood unions called for regulators to block the takeover.

Netflix has traditionally been seen as an anti-Hollywood player because of its reluctance to widely distribute films for the big screen. And unions are concerned that the deal could lead to lay-offs, although Warner Bros chief executive David Zaslav said he didn’t expect widespread job cuts.

A Paramount acquisition could likewise lead to lay-offs, but there have been more voices in Hollywood in favour of a Paramount takeover.

But Paramount as a buyer may raise political concerns. While Netflix’s deal excludes WBD’s legacy television channels, Paramount’s offer is for the whole business — including CNN.

Trump loathes the television network, referring to it as “Fake News CNN”, and may want to see it end up in Paramount’s hands. Paramount owns CBS News where it has recently installed Bari Weiss, a prominent critic of “woke culture”, as editor-in-chief.

Ellison visited Washington in recent days to meet Trump administration officials, during which they discussed his commitment to making CNN’s news operations “more balanced” if his bid succeeds, according to people briefed on the meeting.

WBD and others have also expressed concerns about Paramount’s reliance on investors from the Middle East to fund its offer. 

Saudi Arabia, Abu Dhabi and Qatar are set to contribute almost 60 per cent of the $41bn equity in Paramount’s bid. It’s a rare opportunity for the Gulf states to gain a sizeable stake in one of the most prized American assets, and also a chance for them to continue to diversify into sports and entertainment.

But their interest has raised concerns about their potential influence over a major studio and a large news organisation.

The battle bears a resemblance to Sumner Redstone’s acquisition of Paramount in the 1990s, The New York Times writes, when he fended off a hostile bid and a lawsuit from Barry Diller to gain control of the company. History suggests we could be here a while.

What happens next?

WBD investors fully expect Paramount to raise its bid. The consensus is that they’re probably right, though no final decision has been made inside Paramount HQ, according to people briefed on the matter.

Ellison and his advisers are working through several scenarios, including a higher offer. They’ve had a series of good conversations with WBD shareholders to make their case. 

Mario Gabelli, a fund manager and veteran media investor, said Ellison and his deputies “did an extraordinarily good job at answering questions at a regulatory level, state level and global level with regards to the difference between Netflix and Paramount”.

The clearest sign that Paramount is preparing to sweeten its bid came in a regulatory filing posted on Monday. On page 46, Centerview’s Blair Effron, Paramount’s adviser, texts his friend Roger Altman at Evercore, who is advising WBD, to stress that his client’s last offer “did not include ‘best and final’ in our bid”.

Effron, a veteran media dealmaker, contacted Altman after Zaslav ghosted Ellison’s December 4 text message saying he was willing to go the extra mile to get a deal done. (Full text below.)

It would be wrong to assume Paramount will only raise the headline price from $30 a share, though that’s very possible. Ellison could also offer sweeter terms: a larger termination fee, firmer financing guarantees, or other commitments that boost closing certainty. Paramount must also factor in the $2.8bn break fee that WBD would have to pay Netflix. CreditSights thinks Paramount should offer $32 per share to win the bidding war.

So what does Netflix do in the meanwhile? Sarandos faces the task of steadying his own shareholders, especially after Netflix lost roughly $100bn in market value since mid-September, when talk first surfaced of a potential move on WBD’s assets. As he reassures investors, he’ll also have to gauge their appetite for a bidding war with Paramount. The mood suggests patience may be wearing thin as the stock keeps sliding.

Still, it may serve Netflix to drag out the process. Even if regulators ultimately block the deal, it slows a competitor’s momentum and ties up an ambitious rival. For Sarandos, that’s close to a win-win.