Netflix Stock Gains. The Market Is Betting It Loses Warner to Paramount — Barrons.com
By Andrew Bary
Netflix stock is rallying Wednesday as Wall Street bets that it will walk away from its pursuit of Warner Bros. Discovery now that Paramount Skydance has submitted a revised proposal that was favorably received by Warner Bros. on Tuesday.
Netflix shares are up 5.2% to $82.08, while Paramount Skydance stock has risen 1% to $10.49. Warner Bros stock is down 0.6% to $28.97 despite the higher Paramount bid because a higher Netflix proposal may not materialize.
Most Netflix investors haven't been thrilled with the company's pursuit of Warner Bros. given the high price that Netflix would pay for its studio and streaming business, the ample debt it would need to take on and the negative signaling effect of a big acquisition for a company that has historically grown organically.
Barron's wrote recently that the real winner of the Warner Bros. battle would be the loser of the bidding war because of the likelihood that the winner would overpay. We wrote the loser's stock likely would stage a relief rally.
Gary Black, the managing partner of the Future Fund, posted earlier Wednesday on X that "Netflix should walk away." He cited greater regulatory uncertainty with the Netflix offer.
He pointed out that Netflix stock traded at more than $100 before it surprised Wall Street by agreeing in early December to buy key parts of Warner Bros (its studio and streaming businesses) for $82 billion including assumed debt.
Black has written the risk/reward in Netflix stock has been favorable with considerable upside if it walks away and limited downside if it wins the Warner takeover battle.
Investment manager Mario Gabelli told CNBC Tuesday that Netflix stock would go up sharply if it backs out of the Warner Bros bidding.
Seaport Global analyst David Joyce wrote Wednesday that the new Paramount offer "might just do it."
Paramount boosted its cash offer for all of Warner Bros. Discovery to $31 a share from $30, agreed to pay the $2.8 billion breakup fee to Netflix and accelerated a 25 cents a share quarterly "ticking fee" payable to Warner Bros. shareholders if the deal doesn't close to the end of the third quarter of 2026. Its prior proposal would have started that fee at year-end 2026.
The Netflix offer that was accepted by Warner Bros. involved $27.75 a share in cash for the Warner studio and streaming business with Warner's cable network business to be spun off to Warner shareholders.
The complex Netflix offer has some problems, particularly the uncertain valuation of the Warner cable businesses that would be spun into a new company called Discovery Global.
Paramount still doesn't have the blessing of the Warner Bros. board. Warner said Tuesday that the new Paramount offer "could reasonably be expected to lead" to a superior proposal. Wall Street is betting that Warner Bros. will accept the revised Paramount deal and that Netflix will walk away rather than match the Paramount offer.
There are some problems with the current Netflix offer. The most important probably is the valuation of the Warner cable properties. That valuation is critical to value of the entire Netflix offer.
Versant Media, the cable spinoff from Comcast that owns CNBC and MSNOW (formerly MSNBC), has traded poorly since it made its debut in early January and now is valued at little more than three times projected 2026 Ebitda (earnings before interest, taxes, depreciation and amortization).
Versant shares trade around $30, down from about $45 when the stock began trading last month.
Put a similar multiple on the Warner cable business and there could be less than $1 a share in value per Warner share for that business given what could be $16 billion of debt attributed to it, Joyce wrote Wednesday. That's below the $3 to $4 a share in value that likely would be needed to make the Netflix offer superior to the Paramount offer.
Joyce wrote that Warner and Netflix may need to reallocate debt between the studio and streaming business and the cable business to reduce leverage at the cable business to make the Netflix offer more viable. Such a move would cut the value of the Netflix offer for the studio and streaming business and potentially reduce the value of the total package paid to Warner holders.
"The NFLX match may need to, at a minimum, fix (in conjunction with the WBD Board) the amount of debt now allocated between WBD's S&S (studio and streaming) and DG (Discovery Global) segment," Joyce wrote.
"The valuation leakage risk is possibly too significant now that an improved PSKY offer exists. However, we think this could be a graceful way for NFLX to exit, which their shareholders will likely receive positively — although we do not expect sentiment to return NFLX to its prior highs from last summer," Joyce wrote.
Black posted on X that if Paramount wins, Netflix could be in a position to buy all or parts of Paramount/WBD more cheaply in a few years. Paramount would be paying over $100 billion for Warner Bros. (including assumed debt) if its deal is accepted and it would take on substantial debt to buy the company that analysts have put at seven times projected 2026 Ebitda — most investment grade companies try to keep debt to under three times their Ebitda
Paramount now has a market value of around $11 billion versus over $70 billion for Warner Bros. It's almost unprecedented for such a small market-cap company to buy a so much larger one. It's possible because billionaire Oracle chairman Larry Ellison is willing to backstop a sizable chunk of the financing for the deal and help his son, David, the Paramount CEO, get the prize he seeks.
Write to Andrew Bary at andrew.bary@barrons.com
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