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Hollywood auteurs might claim otherwise, but sometimes what works best on the big screen is pure formula. One who clearly understands that is Paramount Skydance boss David Ellison. His hostile $108bn bid for Warner Bros Discovery skips the creative stylings and presents shareholders with a giant slug of cash. It will be hard for them to refuse.
Skydance’s proposal, which it took straight to WBD shareholders on Monday, beats a rival bid from streaming titan Netflix — which WBD’s board endorsed already — in a few ways. One is that it’s easy to value. Netflix’s proposal is mostly cash, but also includes a slab of the company’s stock, which has fallen nearly 30 per cent from this year’s peak. Moreover, Netflix is only bidding for part of the company: its deal is conditional on WBD spinning off its TV networks, which include CNN, first.
True, there’s not a massive amount in it. The main value question is what that spun-off business is worth. If it makes about $4.5bn of ebitda next year, and trades at the same multiple expected for Comcast’s soon-to-be-spun-out cable business Versant, it would represent about $1.50 per share of value, taking Netflix’s offer to approximately $29, based on Lex’s calculations, a dollar less than Paramount’s.
But there are qualitative attractions for a WBD investor, too. Paramount, whose streaming platform is tiny compared to Netflix, would almost certainly find the path to antitrust approval less tortuous than its rival. Writers and actors, many of whom bristle at Netflix’s indifference towards cinematic releases of movies, will probably find Paramount a more palatable owner of WBD’s studios, too.
As for Paramount’s investors, the deal is reasonably attractive, but not without risk. Consider some round-number maths. WBD is expected to make $6bn of free cash flow next year, according to Visible Alpha, before its interest payments. Add in the $5bn of post-tax cost savings Ellison and his backers think they can extract, and that’s a return on investment of more than 10 per cent, enough to meet WBD’s likely cost of capital.
There is almost certainly more to be wrung out than Paramount is saying. The cost of making content, for starters: the two companies together spend some $37bn a year. It would be no surprise if Ellison would rather not suggest that sum can be trimmed, for fear of baiting the actors, writers and producers who benefit from such outlays.
Meanwhile, putting the two companies together might make it easier for both to keep viewers keen. After all, streaming packages are easy to start and easy to ditch. Viewers who sign up to HBO Max to watch House of the Dragon — or Paramount+ for football season — can easily drift elsewhere when their favourite show ends, so having more content to fire down the digital cannon should help keep eyeballs affixed to screens.
Netflix will spy similar advantages in owning WBD, naturally. The $20bn or so wiped off the company’s market capitalisation on Monday may reflect nervousness that it will raise its own bid. But it’s not clear it needs to. For all Paramount’s prodigious confidence, big media mergers have a poor record at creating value. Ellison’s firm would emerge with heavy debts, at least at first, and the usual people issues that come with such deals. Netflix may not win this battle; that doesn’t mean it loses.
john.foley@ft.com
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