Industry offers its take on Paramount-WBD deal

Paramount’s hostile takeover of Warner Bros Discovery is being seen as the lesser of two evils by industry execs and analysts, despite deep concerns over job losses, creative output and the future of news networks.

Netflix’s decision to walk away from WBD rather than improving on its $82.7bn bid in the face of Paramount’s latest offer was indicative of a company that has always been seen to be “disciplined” in its dealmaking, as co-chief execs Ted Sarandos and Greg Peters put it.

Whether stung by the rapid turn of events or a truthful reflection of their strategy, the duo’s statement that WBD “was always a ‘nice to have’ at the right price, not a ‘must have’ at any price” did not pull any punches.

But it also resonated with industry watchers.

Not only does the global streamer receive a $2.8bn termination fee for its troubles, payable by Paramount on behalf of WBD, it is also poised to gain billions of dollars of value back in its share price.

Wall Street never looked favourably on Netflix’s pursuit of the HBO owner, sending its shares down more than 30% since the takeover talks first emerged, but they were up almost 10% in after hours trading as news of their exit from the process emerged.

Few expected Netflix to turn on its heels quite so soon after WBD pointed to the “superior” nature of the Paramount deal on Thursday, but analysts suggest it makes sense.

For Paramount, WBD was seen a “must have – almost an existential – deal to make because they have been subscale compared to Disney, Netflix or NBCUniversal,” according to David Joyce, senior media equity analyst at Seaport Research Partners.

He added: “They had to do something significant to improve scale economics and to be competitive.”

Robert Fishman, analyst at MoffettNathanson, added that while “the war for Warner Bros. Discovery ended sooner than expected,” the result confirmed its “ongoing view that WBD was a necessity for [Paramount] while Netflix was being opportunistic.

“It signals that Netflix believes in its internal growth story enough to maintain M&A discipline,” he continued, adding that “we also believe the future Paramount Skydance Warner Bros. Discovery – they’ll need a better name – could finally transform two subscale media companies into a more serious industry player, provided management has the financial flexibility to execute on its vision.”

Matthew Dolgin, senior equity analyst at Morningstar, agreed, describing the decision to walk away as “absolutely the right move for Netflix”.

“We estimated it was overpaying for Warner’s streaming and studios when it had no need to, given its extraordinarily strong business. We also think this is the best outcome for Paramount. Unlike Netflix, its business could use a shot in the arm and an immediate boost to achieve the greater scale it needs. Also, with the combination of linear networks, it can realise much more cost savings than Netflix can to offset the premium it’s paying.”

One analyst drew comparisons with Netflix muted interest in MGM in 2020 – when it held initial talks, alongside Apple – before Amazon’s eventual $8bn acquisition. Netflix undoubtedly coveted Warner Bros’s content library in approaching this deal, with catalogue depth one of the areas that requires continuous replenishment for streaming giants to keep subscribers sticky. But with companies still very willing to licence to Netflix, the Stranger Things company is still a winner in this scenario.

“Netflix gets someone to overpay for an average asset…again,” the analyst told Broadcast Interrnational, sardonically.

Cuts, debt and reduced buyers

Paramount estimates $6bn in synergies if the deal goes through, which will mean job cuts. Even with the Ellison family providing north of $43bn to cover the deal, a huge $57.5bn debt pile will still need to be created, on top of WBD’s existing debt of $33.5bn.

A Netflix takeover would have likely saved jobs, and fears are rife in the LA and internationally that the combination of two studio giants will mean considerable pain.

That will be both on the production side but also on streaming, with considerable overlap across HBO Max and Paramount+ in terms of roles.

It also means two buyers become one, although that would likely have come to fruition whether Netflix or Paramount bought WBD, at least in terms of TV content.

Numerous senior production and distribution execs at London TV Screenings told Broadcast International this week that a Paramount deal would be their preferred outcome in terms of creating a more competitive streamer ecosystem, something Paolo Pescatore, founder at PP Foresight, agrees with.

”Unquestionably, a Netflix-WBD deal would have been a far stronger vertically integrated player than Paramount-Skydance. This process has dragged on for way too long, let alone regulatory and other challenges.

“Netflix now exists in a cleaner, faster, and financially intact state. The latter is key as it will have more muscle for future content investment. Netflix can keep on proving that it is the one service people won’t cancel.”

For Paramount, the focus wil be on getting the deal done as quickly as possibly and to start paying down the giant debt pile. Seaport Research analyst Joyce said the Yellowstone owner would “require a lot of creativity” on that front, with job cuts one lever.

“[Paramount] will also need the global cable networks unit – Discovery Global – to support cashflow and pay down the debt, but the issue will be what does the effort to cut costs do to their content creation.

“That could be one of the sticking points on the deal if they are relying on head count reduction, because it could ipmact the volume of film and TV production.

“But they need to produce those shows to sell them to third parties and to monetise it in numerous ways. They will have a stretched balance sheet.”

Pescatore said he expects the European and UK industries to be impacted by the deal.

“Paramount Skydance folding Warner Bros. Discovery into its orbit would be a big reset for Europe and the UK, with the UK immediately in the firing line,” he said.

“WBD is trying to land HBO Max in the UK at pace, but a live deal process injects uncertainty around pricing, packaging and partnerships just when you need a clean launch. Longer term, the combined group can’t justify running two overlapping streamers in every market, so expect aggressive rationalisation: bundling first, then brand and content-window simplification.”

Pescatore also pointed out that Sky would “become even more strategic in the UK,” while the future of SkyShowtime – owned by Paramount and NBCUniversal – is unclear.

Pescatore said the streamer would “become the awkward overlap across parts of Europe, forcing market-by-market decisions about where content lives.”

The deal will have to jump through plenty of regulatory hoops – California’s attorney general Rob Bonta has already promised a “vigorous” review of the acquisition - and European officials will be particularly interested in the ramifications of the deal.

Yet the ‘ticking fee’ element of Paramount’s deal, which will see WBD shareholders receiving around $650m each quarter after 30 September until the transaction closes, suggests confidence is high.

Matt Britzman, senior equity analyst at Hargreaves Lansdown, summed up the views of most.

“While there was clearly scope for Netflix to push higher, management chose discipline over empire building, removing a major acquisition overhang that had been weighing on the shares.

“The bid always looked like a mix of offence and defence – shoring up content and scale, while keeping competition from gaining any edge, but at a very high price – and with that risk now off the table, investors are free to refocus on Netflix’s core strengths: pricing power, margins and execution.

“For now, at least, the market seems to be pricing this as a win for everyone,” he said.