David Zaslav surprised Hollywood and Wall Street when the head of Warner Bros. Discovery reported that selling its company would cost $30 per share, more than triple its stock price for most of this year.
Now the executive’s insinuations seem prescient. Warner Bros. has become the prize in one of Hollywood’s fiercest bidding wars, with Paramount hijacking a deal struck with Netflix a week ago and potentially raising the final price well beyond Zaslav’s once-derided target.
Warner Bros. Discovery shareholders expect Paramount to increase its current offer of $30 per share, which values the entire company at $108 billion and includes debt. And Paramount CEO David Ellison has made clear that offers could rise further, revealing in a regulatory filing Monday that his offer was not “the best and most definitive.”
A person linked to the Warner group said that Netflix’s proposal was expected to be the final chapter, but now it is expected to be a “new season.” For her, the fact that the dispute exceeded $20 per share and reached around $30 is surprising.
A lot will depend on what Warner Bros. does. Discovery will say until December 22, the deadline to respond to Paramount’s proposal.
The board could choose to maintain the deal agreed to with Netflix, which covers only the studio and streaming assets for a valuation of $27.75 in cash and stock. The board’s choice could depend on how it values traditional television assets — CNN and other cable networks — that would remain with shareholders if the Netflix deal goes through.
A bullish reading from a Bank of America analyst in September valued those channels at around $5 per share, which would make Netflix’s bid appear stronger than Paramount’s. But Paramount says the real value of television networks is falling and approaching $1 per share.
If Paramount continues its public offering strategy and a significant number of Warner Bros. players. support Ellison’s proposal, pressure on Warner’s board to get involved would intensify.
CreditSights analysts expect that if negotiations resume, Paramount could increase its offer to around $32 per share, a level that could test Netflix’s willingness to make a counteroffer.
Raising its offer to $32 per share could force Paramount to raise more capital, and possibly ask its Middle Eastern sovereign wealth fund sponsors to increase its capital contribution, which currently stands at $24 billion.
Another alternative would be for Larry Ellison, David’s billionaire father and founder of Oracle, to put more money on the table, given that the family fund guarantees the entire $41 billion capital. Even after Oracle shares fell about 10.8% on Thursday (11), the fund still holds around $225 billion, leaving plenty of room to add firepower.
It’s unclear whether Netflix — whose market value has fallen about 20%, or about $100 billion, since leaking its stake in Warner Bros. Discovery in September – has some appetite to stay in contention.
Warner advisers said “cash is king,” hinting that investors would expect Netflix to convert its partial stock offer to an all-cash proposal. This would risk Netflix losing its Investment Grade rating, as it would have to add $59 billion in debt incurred.
Now Netflix finds itself facing a strategic dilemma. By pursuing the purchase of Warner, it sent a message to investors that it needed the deal to maintain long-term growth momentum, putting pressure on CEO Ted Sarandos to continue bidding and avoid giving the impression that Netflix has gone backwards.
However, a higher offer from Paramount would also give Netflix a smooth exit, with the streaming platform able to say it would like to complete the purchase but has refused to overspend. Such a move would spare it a lengthy and potentially risky regulatory review, while also carrying a $2.8 billion termination fee.
A banker who has worked on several hostile deals said there is a scenario in which all parties get something: Paramount raises its offer modestly, Netflix drops out and Paramount-Warner Bros. Combined Discovery agrees to provide Netflix with exclusive content for a predefined period of time – allowing both sides to claim victory in a battle that no one can afford to lose.
About The Author
