Netflix will now pay all cash for Warner Bros. to keep Paramount at bay

A Netflix sign is displayed atop a building in Los Angeles with the Hollywood sign in the distance. (AP Photo/Jae C. Hong)

LOS ANGELES — Netflix has switched to an all-cash offer for Warner Bros Discovery’s studio and streaming assets without increasing the US$82.7 billion price in a bid to shut the door on Paramount’s rival efforts to snag the Hollywood giant.

The new all-cash bid - at US$27.75 a share - has unanimous support from the Warner Bros board, according to a Tuesday regulatory filing.

Both Netflix and Paramount Skydance covet Warner Bros for its leading film and television studios, extensive content library and major franchises such as “Game of Thrones,” “Harry Potter” and DC Comics’ superheroes Batman and Superman.

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Paramount has altered its terms and engaged in an aggressive media campaign to try to convince shareholders that its bid is superior, but Warner Bros has spurned the David Ellison-led company. It declined to comment Tuesday on Netflix’s all-cash offer.

Warner Bros will hold a special investor meeting to vote on the Netflix deal, with the streaming pioneer saying that the meeting was expected to be held by April.

“Our revised all-cash agreement will enable an expedited timeline to a stockholder vote and provide greater financial certainty,” Netflix co-CEO Ted Sarandos said in a statement.

Shares of Netflix, which is slated to report quarterly earnings after the market close, were up 0.9 per cent. Paramount shares were down 1.9 per cent, while Warner Bros’ shares down 0.5 per cent in early trading.

Alex Fitch, portfolio manager for Harris Oakmark, the fifth largest investor in Warner Bros with about 96 million shares as of Sept 30, predicted the bidding war for Warner Bros may not be over.

“This new agreement only ramps up the pressure,” said Fitch. “The changes show that Netflix is serious about winning, and the accelerated shareholder vote means Paramount needs to act with urgency. Now, it is up to Paramount to provide a clearly superior offer if they want to get this done.”

Earlier cash-and-stock bid replaced

Netflix shares have fallen almost 15 per cent since announcing the merger on December 5, closing at US$88 per share on Friday – well below the US$97.91 floor price of the original bid. That drop was part of Paramount’s argument that its bid was superior.

The new US$27.75-per-share offer from Netflix replaces its earlier cash-and-stock bid for US$23.25 in cash and US$4.50 in Netflix stock.

“The merger consideration is a fixed cash amount to be paid by an investment-grade company, providing (Warner Bros) stockholders with certainty of value and liquidity immediately upon closing the merger,” Warner Bros said.

The company’s board also disclosed its valuation for Discovery Global, a planned spin-off that will contain television assets including CNN and TNT Sports and the Discovery+ streaming service.

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The board has maintained that the Netflix merger deal is superior to Paramount Skydance’s US$30-per-share cash bid for the company because Warner Bros’ investors would retain a stake in the separately traded Discovery Global.

Warner Bros’ advisers used three separate approaches for valuing Discovery Global. The lowest share price they arrived at was US$1.33 per share, by applying a single value across the whole company. The high end of the range they determined was a price of US$6.86 a share, if the spin-off became involved in a future deal.

Paramount has said the cable spinoff central to the streaming giant’s offer is effectively worthless.

Paramount tender expires Jan. 21

The rival bidder went to court on January 12 to expedite the disclosure of this information, so investors could evaluate the competing offers for Warner Bros. A Delaware court judge rejected the request, finding that Paramount had failed to demonstrate it would suffer irreparable harm from the alleged inadequate disclosures about Warner Bros’ cable TV business.

Paramount Skydance, whose tender offer expires on January 21, did not immediately respond to a Reuters request for comment.

“Paramount will make another appeal to shareholders. Unless Paramount raises its bid, the appeal will be window dressing,” Emarketer analyst Ross Benes said.

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The race is expected to come to a head at a shareholder vote later this year as Warner investors weigh the value of cable assets.

Warner Bros reiterated its reasons for rejecting the Paramount bid, saying its all-cash offer of US$30 a share was insufficient after factoring in the “price and numerous risks, costs and uncertainties.”

“Netflix’s move to go all‑cash on the Warner Bros. deal is a smart pivot at a time when its own falling share price had begun to weaken its hand," said Matt Britzman, senior equity analyst, Hargreaves Lansdown. “A cash bid strips away uncertainty and is unquestionably more appealing from Warner Bros.’ perspective, even if it does nothing to ease regulatory scrutiny.”

A merger with Netflix would leave the combined company with roughly US$85 billion in debt, compared with US$87 billion for Paramount. But Netflix is worth considerably more, with a market valuation of US$402 billion, compared with US$12.6 billion for Paramount.

The Netflix tie-up would be less leveraged - carrying a leverage ratio of under four - than a ratio of about seven with Paramount.

Netflix also agreed to allow Warner Bros to reduce the amount of indebtedness to be borne by Discovery Global by US$260 million, according to the regulatory filing.

Netflix also has an investment-grade credit rating, whereas Paramount’s bonds are rated at junk levels by S&P and would likely come under further pressure, Warner Bros said in its filing.

Winning over shareholders’ approval, however, may only be the first step in what could be a long process, given lawmakers across ⁠the political spectrum have ​voiced concerns that further media consolidation could drive up prices and reduce consumer choice.

The Ellisons have argued that their relationship with President Donald Trump gives them an easier regulatory path to approval.

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Reporting by Dawn Chmielewski in Los Angeles, additional reporting by Aditya Soni and Harshita Varghese in Bengaluru, and Ross Kerber in Boston; editing by Dawn Kopecki, David Gregorio and Nick Zieminski