It was about time the resurgent deal boom threw up a really watchable hostile bid.
Just days after Hollywood studio Warner Bros Discovery Inc. agreed to be bought by Netflix Inc., Paramount Skydance Corp has made a $108 billion offer straight to the iconic Hollywood studio's shareholders. The counterbid has many attractions. It puts Warner on the spot to explain precisely why it didn't engage with the interloper, backed by the billionaire Ellison family, more assiduously when a friendly deal was being attempted.
Things were already getting ugly before Monday's dramatic twist, with Paramount complaining to Warner last week about being shut out of the sale process. You can see why Paramount didn't give up: A combination with Warner would produce the world's largest studio with a franchise list that goes on and on - Harry Potter, Barbie, Top Gun...
Crucially, the bids aren't directly comparable. Netflix is offering shareholders $27.75 per share for Warner's studio and streaming assets. That will be paid mostly in cash but also in $4.50 per share of Netflix stock. Warner's shareholders would also be left stuck with the cable television assets that are soon to be spun off. So in sum, they end up with some cash and two stocks, one of which is yet to be valued by the public markets.
Analysts at Barclays Plc reckon the cable business is worth around $4.20 per share. On their math, the Netflix offer overall is worth around $32 per Warner share.
By contrast, Paramount is offering $30 a share in cash for the whole of Warner. Chief Executive Officer David Ellison – son of Oracle Corp. founder Larry Ellison – reckons this pitch is worth more than Netflix's. That's because he values Warner's cable stub at just $1 per share. That seems pretty harsh, but the gloves are off now and bad-mouthing in hostile deals can get a good deal worse.
Where Paramount is making a clearly superior proposal is in terms of a speedier and more certain path to completion. Netflix's offer needs heavy discounting for likely antitrust scrutiny, given the sheer scale of the combined streaming platform marrying Netflix with Warner's HBO. President Donald Trump had already sounded caution on Netflix's enlarged market share. All in all, the Netflix payout looks less certain and further away – and so is worth less in real terms.
Ellison's pitch doesn't just pose less serious antitrust concerns. It comes wrapped in a Trumpian bow with financing partly from Affinity Partners, the finance boutique led by the president's son-in-law, Jared Kushner. Combine that with backing from Middle East sovereign wealth funds, and Paramount is mimicking the successful playbook evidenced in the leveraged buyout of Electronic Arts Inc., which involved Silver Lake Management partnering with Affinity and the Saudi Public Investment Fund.
As analysts at TD Cowen say, it's very hard to argue that Netflix's offer is better. Time to run the credits? Not so fast. There may be more drama to come. Paramount would surely prefer to reach an agreed deal with Warner. There's always value in the less conflictual option. It has already indicated it's ready to sit down and talk. Getting to a handshake would perhaps need a sweetener, providing a pretext for Warner to switch sides -- and contribute to the break fee due to Netflix.
But having come so far, it would be surprising if Netflix were ready to abandon such a strategic transaction without a fight. With a $400 billion market value and prodigious cash flow, it surely has the financial capacity to sweeten or simplify its more fiddly proposal. The continued slide in Netflix stock in response to Paramount's intervention suggests investors are bracing for a costly auction.
Paramount looks capable of justifying more stretch. It has indicated higher cost-saving potential, at $6 billion per annum versus Netflix's $2.5 billion (likely due to the extra opportunity from keeping Warner's legacy television business). Bloomberg Intelligence reckons a deal at $35 a share would still stack up for Paramount. Moreover, David Ellison may just want this more.
The onus now is as much on Warner boss David Zaslav as it is on Netflix to respond. His defence tactics have got the auction to a pretty spectacular place so far. Warner must now either engage with Paramount or explain very clearly why it's choosing a Netflix-shaped future.
Disclaimer: These are the personal opinions of the author.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
