Netflix’s $82 Billion Power Play for Warner Bros.

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1:20Bloomberg Audio Studios. Podcasts, radio, news. A tech powerhouse is buying one of Hollywood's oldest studios. Netflix has announced a definitive agreement to acquire Warner Brothers Discovery. It's a cash and stock deal valued at$82.7 billion, including debt. It became a three-horse race between Comcast, Netflix, and Paramount. At the outset of that, people thought that Paramount was the favorite. Paramount came on really aggressive. They started this process, right? They made three unsolicited offers. That's Lucas Shaw, who writes the Screamtime newsletter for Bloomberg and reports on the entertainment industry.

2:00He and his team broke story after story as this deal came together. And Lucas says Friday's announcement was, if you step back, a huge surprise. Netflix has never done a deal anything close to this size. I don't think they've ever done a deal that was a billion dollars, let alone$83 billion. They have been averse to the regulatory headaches that come with deals like this. They've been they don't like the complications internally of integrating and combining and all of that. Less than two months ago, I interviewed co-CEO Greg Peters, and he said these types of deals don't usually work. There's been some reports around you guys being interested in Warner Brothers Discovery.

2:39Is there any truth to that? I'd say this. You know, we come from a deep heritage of being builders rather than buyers. I also think that it's, you know, one should have a reasonable amount of skepticism around big media mergers. They don't have an amazing track record over, you know, the history of time. The companies expect it will take more than a year for this deal to close and regulators will have to approve it. Netflix is not buying all of Warner Brothers Discovery. It's not interested in CNN and TNT and other Warner Brothers networks. What Netflix is getting is a huge library of films and TV shows.

3:41shows for everyone. Then you throw in HBO, which is, you know, one of the great brands in modern entertainment, again, has a tremendous library, has a programming team that has continued to make shows that people want. That library, those titles are what Netflix was interested in. They have always said that is the one type of thing that they would buy. The way the deal will reshape Hollywood remains to be seen. But in the meantime, Lucas says, it marks a milestone for the entertainment industry. It puts one of the oldest and most powerful studios in the hands of a company that was until recently seen and maybe still is seen as sort of a Silicon Valley interloper.

4:23I'm David Gura, and this is The Big Take from Bloomberg News. Today on the show, Netflix wins the bidding war for Warner Brothers Discovery. The details of the deal, what it means for us viewers, how Netflix's rivals are reacting, and what, if anything, stands in the way.

4:44When Netflix and Warner Brothers Discovery announced this deal, Netflix's co-CEO Ted Sarandos touted the, quote, incredible library of shows and movies the company is acquiring. From Casablanca to The Sopranos to Game of Thrones, Netflix customers will have a lot more to watch. But Bloomberg's Lucas Shaw says Netflix may have another motive. If you wanted a more pessimistic take on why Netflix is doing this and why they're doing it now, it would be that Netflix's growth has slowed over the years, that it is looking ahead at the future of the company and trying to figure out how it will next grow, and it's not sure.

5:24And so it is doing the classic kind of big company thing where it's going to grow through acquisition and believe that buying another big company is going to solve something for them. I think there's a reason to be skeptical that this will have a huge impact. Like, is adding the Warner Brothers library going to make people more likely to sign up for Netflix, less likely to cancel? And it might on the margins, but is it going to do so to the tune of paying 70, 80 billion dollars for something? You were on the conference call Friday morning. You've been talking to sources. What do they say about what this experience is going to be like for viewers?

6:02Is everything going to be branded as Netflix? Is this going to kind of live on as Warner Brothers going to live on as a discrete property within that empire? What's it going to look like for you and for me? It's unclear at the moment. They are saying that Warner Brothers will continue to sort of operate in its current form. So that means Warner Brothers movies will still be released in theaters. Warner Brothers television studio will still produce for third parties. Warner Brothers studio will continue to license its film and television to third parties. and HBO will continue in some form as well.

6:37They're not going into a tremendous amount of detail beyond that. I'm sure they have a lot of thoughts on it. I wouldn't be surprised if they haven't even answered that because keep in mind that it's been basically a month of them really being in it with this deal and they've been focused on getting the deal done. They've obviously run models on what it would look like and yada, yada, yada, but they now have 12 to 18 months to try to figure out what they actually want to do with this asset that they've bought. You know, the big question for the consumer, other than am I going to get movies and theaters, is what's going to happen with HBO and HBO Max?

7:10Am I going to continue to pay for that as a separate service? Is it going to be an add on to Netflix? Are they just going to fold all that stuff into Netflix? I think what they're going to do is they're going to take some of the titles that are in the library right now, say Friends, and that will just be available to all Netflix customers. There's no reason to gatekeep that on HBO. With HBO, they will either fully integrate that in the Netflix and just raise the price of Netflix. I think that's less likely. I think the slightly more likely scenario is that they create a add-on where you can add on HBO for$5 or$10 a month to your Netflix subscription.

7:45Because this is already something that Amazon and Apple and others do, right? They sell channels. And if Netflix is trying to be the app that you come to to watch everything, why not make that the base? What does this mean for the entertainment business? I saw a former Warner Brothers CEO tweet after this deal was announced. If I was tasked with doing so, I could not think of a more effective way to reduce competition in Hollywood than selling Warner Brothers Discovery to Netflix. How does this change the terrain of Hollywood? It is like the ultimate conquest of this tech takeover of the entertainment business that you now have Netflix buying Warner Brothers.

8:21I think the only thing that could be more symbolic would be Netflix buying Disney or Apple buying Disney. A lot of people are worried about the concentration of power or the more day-to-day stuff. And I don't know that it immediately changes it that much. It may change it less than Paramount buying Warner Brothers, right? Because then you have two studios that are very similar combining. Part of the Netflix argument was like, we don't really have a studio like Warner Brothers. We can keep it mostly intact. We will not fire as many people. But I do think that the average person in Hollywood is freaked out.

8:55because they didn't really think this was going to happen, right? I think most people thought Ellison was going to do it, the Paramount bid. And now having Netflix, this company that has completely upended the business model in the entertainment business, that is, you know, respected, but also in some cases sort of feared and loathed by many, now being in possession of this crown jewel and with great uncertainty about what that will look like. I just think people are uncertain. But uncertain because change is scary, not because they really know what's going to happen. When you look at the numbers here, Warner Brothers shareholders receiving$27.75 a share in cash and stock in Netflix, total equity value of the deal$72 billion, enterprise value$82.7 billion.

9:37What makes those numbers make sense for Netflix? And I guess looking at the other side of the coin, what made this a compelling argument for the board of Warner Brothers Discovery? room. When news first broke that Paramount was interested in buying Warner Brothers, the company was trading for at less than$15 a share. So it's getting paid, depending on how you calculate it, about double what it was trading at before all this started. So that's obviously a good deal for the shareholders. As for how the number works for Netflix, they swear that they've run their models and they actually think that there is more value to be extracted than they have in the deal.

10:12Now, you're obviously going to say that when you do the deal because you're trying to justify it to your shareholders, to your board members. I think there's been some concern among investors over the last month. The Netflix share price has ticked down pretty consistently as it's become more and more likely that this is going to happen. I think shareholders and investors and board members are probably also a little nervous at just about what this will mean for this company. One of the reasons it has succeeded is focus and not doing things like this. But look, they get to the math clearly because they think that they can improve the core business of Netflix by adding some of those Warner Brothers properties.

10:47It will allow them to reduce churn, raise prices, make it even stickier maybe if they do sell HBO as an add-on. And they are now venturing into businesses that are complementary that they have avoided, whether that's consumer products, theatrical releases. Warner Brothers owns a video game studio, Netflix has tried to get its video game business going and it hasn't been super successful. So, you know, they clearly believe that this makes them more valuable in the future. Whether that will be true, you know, time will tell. One of Netflix's rival bidders was Paramount Skydance. That company has complained about how the bidding war unfolded, raising the question of whether it will pursue legal action.

11:30We'll get into that after the break.

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13:30The competition for Warner Brothers Discovery began after Paramount Skydance made an unsolicited offer to buy the company. For a while, it seemed like Paramount Skydance, fresh off another media mega deal, was the frontrunner. But in late October, Warner Brothers announced it was considering a broad range of options. Comcast and Netflix threw their hats in the ring. And Bloomberg's Lucas Shaw says in the end, personality and ego may have been big factors. I think, you know, Paramount came on really aggressive. They started this process, right? They made three unsolicited offers. And there was a confidence and some might even say an arrogance in the way that they went about it where they felt all along, we are the only ones who can get this deal approved.

14:15We are the best offer. I think they looked around and they were like, there's no way that Comcast is going to be able to do this. Trump wouldn't allow it. Amazon and Apple probably don't want to do it. And even if they did, is Trump really going to allow it? And I just think most people never thought Netflix was going to go this far. You know, you look at the leaders, David Ellison doesn't really have a relationship with David Zaslav. In fact, they fought a lot over this South Park kind of licensing deal that Warner Brothers sued over. Now that predated David Ellison taking over Paramount, but David Ellison did not solve it coming into Paramount.

14:51Meanwhile, Ted Sarandos has spent a lot of the last year becoming buddies with David Zaslav, sitting courtside at Knicks games, watching UFC fights. And I think people probably underestimate how much that stuff matters. Like David Zaslav is the CEO of the company. A lot of people on the board like him. Like I spoke with someone who sort of travels in these circles last night. And that was what they chalked it up to. It was like Ted knew how to play the game and David Ellison didn't. And that pushed him over the edge. If the deals are pretty equal, which they are. I know that you saw the letter that I did from Quinn Emanuel, Paramount's law firm, directed to David Zaslav, as all of this was in its late stages, kind of crying foul about this process, alleging that Paramount had been unfairly maligned here as it unfolded.

15:37Does Paramount have any recourse here legally? Can it push any buttons, move any levers regulatorily? what's it able to do going forward here? Well, they've been laying the groundwork for that, sending these letters to Warner Brothers saying that the process was unfair. The management was biased towards Netflix and steered it that way, and they made a last-minute change to David's as-of contract that made it easier for the Netflix deal and yada, yada, yada. I was told by someone close to David Ellison on Thursday night that they would inevitably sue Warner Brothers over this. I don't know if they will.

16:13I'm not a legal expert on that, so I'm not sure exactly how it'll play out. And whether they will choose to fight it themselves or whether they will really lobby the president hard and legislators hard. I mean, we've already seen politicians on both sides of the political aisle come out and say they're against the deal. Daryl Issa well before Elizabeth Warren just Friday morning. I'm sure we'll see more come out. And I guess the, you know, the big open question is where exactly does Donald Trump stand on this? Because he is seen as being close to the Ellisons. But I also know that that Netflix has been putting in the time to try to improve its relationship with the administration.

16:55Do you see this as a done deal or how much are you thinking that that, you know, potential regulatory difficulty, legal difficulties could complicate this process coming out the way both of these companies hope it will? I think a lot of that is going to depend on where the presidential administration lands on it. You know, Netflix's argument against Paramount was always that it wouldn't fly muster overseas or with state attorneys general. It's possible that states will come out to try to fight it if there's enough outcry. It's certainly possible this will get reviewed in other countries, given Netflix's might in much of the world.

17:29But I feel like it's really hard to predict or guess on antitrust and deals right now because our kind of political situation is so unorthodox. And so much of this deal also depends on like how are you defining a market, right? If you are looking very narrowly at market share in Hollywood-produced streaming content, or Hollywood streaming services, specifically Hollywood, so excluding YouTube, then Netflix has a substantial share of that market. If you're looking at streaming, Netflix is the second biggest player, but it's a minority of the market, less than a third of the market. Even with this, it'd probably be less.

18:15If you're looking at television in the U.S., Netflix is less than 10 % of the market. The combined company is still smaller than YouTube. So a lot of it's going to depend on how people look at it and what they see as fair or unfair.

18:32This is The Big Take from Bloomberg News. I'm David Gurrat. The show is hosted by me, Juan Ha, and Sarah Holder. The show is made by Aaron Edwards, David Fox, Eleanor Harrison Dengate, Patty Hirsch, Rachel Lewis-Kriskie, Naomi Ng, Julia Press, Tracy Samuelson, Naomi Shaven, Alex Segura, Julia Weaver, Yong Yong, and Taka Yasuzawa. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. Thanks for listening. We'll be back on Monday.

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