Since last autumn Netflix and Paramount have been chasing Warner Bros Discovery like a pair of Wile E. Coyotes in pursuit of a Road Runner. Paramount, recently acquired by the Ellison family, was initially the favourite to capture the prize. But last month Netflix dropped a giant cartoon anvil on the Ellisons when it announced that it had signed a deal with Warner’s management to acquire most of the company.
The chase is not over. Paramount is loudly trying to persuade Warner shareholders to defy management and accept its bid, which it argues is “superior to Netflix’s in every dimension”. On January 20th Netflix responded by improving its own offer, which values Warner at $83bn, from a mixture of cash and stock to one that is purely cash. It hopes this will speed up Warner’s approval process; a shareholder vote is expected by April.
Things could change before then. In the past week both bidders have been on lobbying trips to Europe to try to persuade regulators that they would make the better suitor. As the smaller of the two firms, Paramount seems to have an easier case in terms of antitrust. Netflix’s full-year results this week served as a reminder of its might: 325m global subscribers, revenue growing at 16% a year and an operating margin of nearly 30%. Combined with Warner, it would tower over its Hollywood rivals.
Yet Netflix pointedly noted in its letter to shareholders this week that competition in video now extends far beyond Hollywood. Including YouTube and the like, Netflix accounts for less than 10% of TV viewing in most of its big markets. It also argues that its deal would be better for American jobs than that of Paramount, which is planning a $6bn “cost-synergy opportunity” if it gets the chance to merge its studio with Warner’s. And although the Ellisons’ friendliness with Donald Trump may give them an edge in America, this may not help their case in Europe, which the president has antagonised with his efforts to nab Greenland.
Rather than rely on regulators to give Netflix a red light, Paramount looks likely to improve its own bid. It is currently offering $30 per share for all of Warner, whereas Netflix is offering $27.75 for just its streaming platform and studios, allowing Warner shareholders to hang on to the firm’s TV and cable networks. Whose deal is better depends on how those declining TV networks are valued. Paramount insists that its offer adds up to more. But to persuade Warner shareholders to defy advice from their management, it will probably need to raise its price.
Netflix will then face a dilemma. Its all-cash switch this week shows its seriousness about acquiring Warner. But unlike Paramount, which can draw on the Ellisons’ family fortune in Oracle tech stocks, Netflix has its own shareholders to worry about. Many of them are not convinced by the Warner project: Netflix’s market value has fallen by nearly a third since it began circling the company in October (see chart). Shelling out even more could test their patience.
Netflix may raise its bid by another dollar or two per share, suspects Robert Fishman of MoffettNathanson, a firm of analysts. But whereas Paramount needs Warner’s scale to remain competitive in streaming, for Netflix the Warner transaction is mostly a giant content deal. Netflix has a history of being prepared to walk away when content prices get too high: last year it allowed the Ellisons to outbid it with a Looney Tunes offer of $7.7bn for seven years of Ultimate Fighting Championship rights.
Expect more twists and turns in the race towards the shareholder vote in April. For now, writes Mr Fishman, “The most likely next step…is more bids to come.” Anxious times for Netflix and Paramount, but good news for the Road Runner. ■
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