Paramount Skydance Poised to Acquire Warner Bros. Discovery After Netflix Bows Out of Bidding War

In a stunning twist, Netflix is declining to raise its bid for Warner Bros., positioning David Ellison’s Paramount as the winner in the battle for the fabled studio.

via: Variety

Paramount Skydance is poised to acquire Warner Bros. Discovery in its entirety after a whirlwind afternoon in which Netflix dropped out of the hunt despite having reached an agreement in December to acquire most of WBD.

Netflix on Thursday afternoon formally declined to increase its offer for Warner Bros. Discovery after the WBD’s declared Paramount Skydance’s latest bid a “superior proposal” to the agreement it already had in hand with Netflix.

The swift decision by Netflix to walk away will certainly come as a shock to the industry because the streamer had four business days, or until Wednesday, March 4 at 11:59 p.m. ET, to come up with a new proposal to salvage its WBD deal. Adding to this surprise is the fact Netflix co-CEO Ted Sarandos was in Washington, D.C. earlier Thursday in an effort to lobby Trump administration officials on the deal, which Netflix had a merger agreement in place for, amid Paramount’s new $31 per share offer.

“The transaction we negotiated would have created shareholder value with a clear path to regulatory approval,” Netflix co-CEOs Ted Sarandos and Greg Peters said in a joint statement issued Thursday, less than two hours after Warner Bros. Discovery revealed its board’s new decision. “However, we’ve always been disciplined, and at the price required to match Paramount Skydance’s latest offer, the deal is no longer financially attractive, so we are declining to match the Paramount Skydance bid. Warner Bros. is a world-class organization, and we want to thank David Zaslav, Gunnar Wiedenfels, Bruce Campbell, Brad Singer and the WBD Board for running a fair and rigorous process. We believe we would have been strong stewards of Warner Bros.’ iconic brands, and that our deal would have strengthened the entertainment industry and preserved and created more production jobs in the U.S. But this transaction was always a ‘nice to have’ at the right price, not a ‘must have’ at any price.”

The statement continued: “Netflix’s business is healthy, strong and growing organically, powered by our slate and best-in-class streaming service. This year, we’ll invest approximately $20 billion in quality films and series and will expand our entertaining offering. Consistent with our capital allocation policy, we’ll also resume our share repurchase program. We will continue to do what we’ve done for more than 20 years as a public company: delight our members, profitably grow our business, and drive long-term shareholder value.”

The now-dead Netflix deal, which included buying Warner Bros. and HBO Max, was valued at nearly $83 billion. Paramount’s latest bid, submitted Feb. 24, was an approximately $111 billion bid for the entirety of WBD, including its linear cable channels.

In a statement, WBD CEO David Zaslav tried to put a positive spin on the extraordinary turn of events, citing Netflix co-CEOs Sarandos and Greg Peters and chief financial officer Spencer Neumann.

“Netflix is a great company and throughout this process Ted, Greg, Spence and everyone there have been extraordinary partners to us. We wish them well in the future,” Zaslav said. “Once our Board votes to adopt the Paramount merger agreement, it will create tremendous value for our shareholders. We are excited about the potential of a combined Paramount Skydance and Warner Bros. Discovery and can’t wait to get started working together telling the stories that move the world.”

Samuel A. Di Piazza, Jr., Chair of the Warner Bros. Discovery Board of Directors added, “I am extremely proud of the rigorous process this Board has run over the past five and a half months that has led us to the cusp of combining these two storied companies and the excitement it will bring to audiences for many years to come.”

Among the parts of Paramount’s new bid that the Warner Bros. Discovery board says it found more favorable to Netflix’s offer were the increased purchase price to $31 a share in cash; increasing the regulatory breakup fee to $7 billion in the event the transaction does not close due to regulatory matters and Paramount reaffirming it will pay the $2.8 billion termination fee which WBD would be required to pay to Netflix to terminate the existing Netflix merger agreement.

Hollywood insiders were left reeling by the swift about-face in Netflix’s plan to become even more deeply ingrained in the traditional film and TV business. Now, the reality that one of Hollywood’s foundational studios, the mighty Warner Bros., and the pioneering brand of pay-TV, HBO, are about to be absorbed by another legacy studio is sinking in. Given the significant overlap of operations in film and TV production and programming, the industry is bracing for another big round of job losses.

There are many unknowns about how Warner Bros. Discovery will operate under Paramount’s ownership. Paramount’s triumph in the bidding process almost certainly means that WBD will no longer spin off its linear cable channels into a separate company that would have been called Discovery Global. It was WBD’s plan to spin off the cable channels that ignited the auction process around the studio last fall. WBD’s intention to shed its linear channels was the factor that spurred Netflix to get serious about buying Warner Bros. and HBO.

Now, WBD’s significant collection of cablers — including CNN, TNT, TBS, Cartoon Network, Discovery Channel, Animal Planet, Food Network and HGTV — will presumably be folded into the existing Paramount linear channels group headed by George Cheeks, who also oversees CBS.

Industry insiders are still shocked that Paramount Skydance was able to turn around what appeared to be an embarrassing defeat for CEO David Ellison. After making multiple unsolicited overtures to WBD last fall, the WBD board was forced to begin a sale process that played out in late October and November. The fact that Netflix was a contender in the process, along with Paramount and Comcast, came as something of a surprise given that the streamer has followed a non-traditional path to building a world-beating pay-TV outfit with unprecedented global reach.

Netflix was able to secure its agreement with WBD by Dec. 5. That deal, which did not include the cable channels, was valued at $27.75 deal a share, or $82.7 billion. Paramount’s all cash, $30 a share offer for the entirety of the company was rejected by the WBD board without any substantial back and forth. But when Paramount upped the ante to $31 a share, or about $111 billion in total, WBD had no choice but to engage.

The first formal negotiations between Paramount leaders and the WBD board came last week during the seven-day period that ended on the night of Feb. 23.

The Netflix-WBD deal was always going to face incredible scrutiny from federal regulators and the Justice Department given Netflix’s presence and stature in the subscription streaming marketplace and WBD’s own size and scope. But the situation became entangled with the bare-knuckles and openly partisan politicking that dominates all discourse in Washington, D.C. in the Trump era. David Ellison is the son of tech billionaire Larry Ellison, who is using his personal fortune to guarantee most of the financing behind the all-cash transaction. Larry Ellison has been a vocal supporter of President Donald Trump. His son was not shy at all about touting that connection as a key advantage for Paramount in the regulatory review process.

David Ellison also traveled to Europe to lobby against Netflix-WBD with key regulators in the U.K. and the European Union who would have had to sign off on the deal given Netflix’s market share in their territories. In past media mega-mergers, companies were able to agree to concessions or divest certain assets that might have stood in the way of winning approval for a deal. In Netflix’s case, its international reach is part of the DNA of its platform, meaning there would likely be no simple divestiture solutions.

The fact that Sarandos met with the Trump administration officials hours before Netflix bowed out of the chase for WBD spurred immediate speculation that the co-CEO was warned of a hellacious regulatory battle. Already, the Justice Department had initiated the toughest form of antitrust review, probing whether the combination would give Netflix monopoly power over the market for streaming services as well as film and TV production activity.

Sarandos and others scoffed at the notion that it would be anywhere close to monopoly power even with Netflix and HBO Max brought under the same roof. But the harsh reality of the cut-throat and deeply partisan landscape in D.C. — as evidenced by President Trump’s recent outbursts related to the deal — may have simply proven too daunting for Netflix amid the threat of zealous Justice Department officials ready to probe all aspects of its business in a process that could take well over a year.

The specter of the Ellisons’ currying favor with the administration to win support for WBD drew a sharp rebuke from Sen. Elizabeth Warren, D-Mass. Warren is generally opposed to big business mergers given the potential harm to consumers. But in this case, Warren called out the politics surrounding the key players.

“A Paramount Skydance-Warner Bros. merger is an antitrust disaster threatening higher prices and fewer choices for American families. What did Trump officials tell the Netflix CEO today at the White House? A handful of Trump-aligned billionaires are trying to seize control of what you watch and charge you whatever price they want. With the cloud of corruption looming over Trump’s Department of Justice, it’ll be up to the American people to speak up and state attorneys general to enforce the law,” Warren said.