Warner Bros now has 10 days to respond to Paramount's flex, with the tender open for 20 working days. For WBD shareholders, this is an attractive proposition, not just because of the valuation involved and the higher cash offer, but because it is the cleaner option to work with, with Paramount buying the entire WBD asset base and avoiding the structural carve-out required under the Netflix-led transaction. 

Regulatory and Political Dynamics: Why Paramount May Have an Edge 

A Paramount deal would also be the relatively smoother option in terms of securing approval from both regulators and Donald Trump. It would still face strong scrutiny, but with the Ellison family being major donors to Republican causes, and Jared Kushner also throwing his weight behind the Paramount bid, it would presumably find the passage to full sign-off somewhat less onerous. Many sense that a Netflix tie-up could ultimately end up in the courts, similar to 2018 when the DoJ attempted to block AT&T’s takeover of Time Warner. AT&T ultimately did succeed, but the full process lasted just over six months. 

WBD Share Price Discount Signals High Regulatory Uncertainty

The fact that WBD closed at $27.23 and at a discount to both Netflix’s $27.75 offer and Paramount’s $30 offer suggests that arb traders are seeing high regulatory uncertainty, as well as the opportunity cost of aggressively covering the spread given the possibility of a lengthy legal process. One could also argue that this discount still implies Netflix has the higher probability of walking away with the prize. 

Should WBD shareholders accept Paramount’s offer, WBD would need to pay a $2.8b breakup fee - which one assumes could be passed on to Paramount. The next question would be whether Netflix counters. The fact that Netflix is in exclusive talks with WBD would make this uncomfortable for Netflix management, but acquiring WBD would be a strategic game-changer for Paramount, which desperately needs scale and would benefit enormously from WBD/HBO’s strong IP and the uplift to its streaming platform. 

It’s no surprise that PSKY shares closed +9% higher on the day, as shareholders love the tie-up, the synergies, and the EPS uplift from the potential transaction. 

Conversely, Netflix closed -3.4% at $96.82. The move is interesting as Netflix shareholders have been unsure about a WBD tie-up — not just because $83b is a substantial outlay and media deals have a poor track record, but because many see high execution risk in integrating the studio and streaming assets and are not yet convinced on the prospect of increased operating leverage on its content spend. As such, if Paramount were to be successful, Netflix shares would likely see a strong relief rally. 

That isn’t the case today, suggesting frustration from Netflix shareholders who could still be on the hook for a $5.8b breakup fee if Paramount is successful and without anything to show for it, especially as a hostile counteroffer was always a strong possibility.

Netflix has the backing of the WBD board, but winning over WBD shareholders may be an entirely different proposition. The share price reaction also suggests Netflix may need to sweeten its $27.75 offer. Given the intensity of the news flow, this is a highly fluid situation. We now watch to see how WBD shareholders and management respond and whether Netflix management makes any kind of countermove. Paramount is clearly attempting to win the hearts and minds of Hollywood and movie lovers, and its $100b offer is a highly enticing carrot - but there is perhaps one more twist in this thriller still to come. 

Good luck to all...