After months of negotiating, Netflix (NFLX) has bowed out of its proposal to buy Warner Bros. Discovery (WBD). Instead, Paramount Skydance (PSKY) will take the prize.
Or, more accurately, it might take the prize.
There may have been handshakes and signatures exchanged between it and Warner. But the deal still needs regulatory approval, which could take a while considering the political uproar it’s inspired.
Senator Elizabeth Warren (D-MA), for one, called the $110 billion deal “an antitrust disaster threatening higher prices and fewer choices for American families.” And California Attorney General Rob Bonta reminded readers on X that:
These two Hollywood titans have not cleared regulatory scrutiny – the California Department of Justice has an open investigation, and we intend to be vigorous in our review.
And then there’s the small matter of paying. At $110 billion, the acquisition price is about 7 times the current market capitalization of Paramount Skydance, which sits at around $14.5 billion as I write. In order to pull that off, the Ellison family has to put up about $47 billion alongside $54 billion in debt.
If the deal clears that hurdle, Paramount will gain a collection of very valuable properties, including Warner Bros.’ 2.6-million-square-foot Burbank Studio complex. That kind of top-notch real estate is a big reason why the bidding war broke out over WBD in the first place. And, yes, there is a treasure trove of media IP that the company would gain access to.
But, between the regulatory scrutiny and the huge price tag, I can’t help but feel that what Paramount really bought was a headache.
And it makes Netflix is the real winner here…
Netflix Gets the Last Laugh (Again)
Netflix’s bid for WBD made sense… at the right price. But stepping back after Paramount’s latest bid was the prudent choice.
For one thing, Netflix will get a $2.8 billion breakup fee. That’s money for doing nothing – never a bad thing.
Also, one of the company’s largest streaming rivals will now be saddled with mountains of debt as it tries to swallow the elephant that is WBD. There is a scenario where Paramount collapses under that strain and Netflix swoops in to buy the Warner Bros assets at fire sale levels.
Sometimes, the best deals are the ones you don’t make. I think that’s the case with Netflix here. And it isn’t the first time.
Twenty-five years ago, I was a developer for Blockbuster. The company was on top of the world back then, and I was kept busy building new video rental locations. In 2000, Netflix approached Blockbuster with a deal to sell the company for $50 million.
Everyone was using Blockbuster, whereas Netflix was still a startup business – and a floundering one at that. So, it wasn’t surprising when Blockbuster turned the offer down.
In fact, then-CEO John Antioco reportedly laughed Netflix co-founders Marc Randolph and Reed Hastings out of the room. Yet we all know who got the last laugh.
Blockbuster was committed to a model that was already on its way out the door. Netflix, on the other hand, was investing in the future.
That’s why it survived and Blockbuster didn’t.
Moreover, Netflix worked hard to maintain its edge long after triumphing over Antioco. It went from a mail-in subscription service… to a streaming service… to creating its own content alongside other offerings.
Was there opportunity for Netflix in acquiring Warner Bros? I’ve already said there was… at the right price.
If Netflix had acquired Warner Bros., it would have gained an enormous content library and powerful franchises. And I’m sure those assets would have been worth it for $72 billion – which is what the tech giant initially offered.
They’re just not worth it for much more than that. Not for Netflix, anyway, since it’s already dominating the entertainment landscape.
When Blockbuster turned down Netflix, it signaled a kind of clueless arrogance – the belief that there’s no more work to be done once you reach the top. But that’s not the story with Netflix walking away from Warner Bros.
Even without the deal, the company has plenty of avenues for success. That’s why analysts expect the business to grow 24% both this year and next.
There’s still a lot of question marks around the Paramount/Warner Bros. deal.
I’m still curious to see if Senator Warren takes a shot at the deal. It’s an interesting drama to watch, if nothing else.
But when it comes to investment opportunities, I’m more than happy to “settle” for the much more predictable storyline of Netflix.
Regards,
Brad Thomas
Editor, Wide Moat Daily
P.S. Tune into The Wide Moat Show on Thursday, where I’ll be discussing some “Sweet 16” stocks to buy. It is March Madness after all…
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