Netflix to Buy Warner Bros. in $72 Billion Cash, Stock Deal

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1:02Bloomberg Audio Studios, podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. It is Merger Friday here. Netflix agrees to buy Warner Brothers Discovery in a historic combination, joining the world's dominant paid streaming service with one of Hollywood's oldest and most revered studios to get the bottom. And this gets some real analysis with this. We turn to Geetha Ranganathan. She covers all the media companies for Bloomberg Intelligence here.

1:45You know, it's interesting, Geetha, you could argue that Paramount, Skydance and Comcast arguably needed this Warner Brothers Discovery Company more than Netflix. Yet Netflix comes out on top here. What do you think the strategy for Netflix is? Yeah, thank you so much, Paul. So definitely Netflix here kind of really looking at the future. I mean, we are, I think, at this cusp of the media landscape kind of completely changing with the advent of Gen.AI. And I think the barriers to entry for anybody is going to come down substantially because the costs to produce content are going to come down substantially.

2:22And I think Netflix kind of sees the writing on the wall and says that they really need to play the long game here and deepen their library with a lot of the beloved and global franchises that Warner Brothers Discovery has to offer. So absolutely not seen as existential for Netflix at all. But I think they see it as existential from a long range perspective. But of course, the big losers here, definitely Paramount and Comcast, at least in the short run. And talking about Paramount and Comcast here, how are we thinking about the added pressures that they may be potentially facing if we think about the fact that they are lower or subscale, I should say, in terms of their streaming in comparison to Netflix?

3:02Yeah, this is pretty much game over. We already knew that Netflix had won the streaming wars. Now, without a shred of doubt, they are going to cement their dominance. I mean, you just look at the numbers, 450 million global streamers. Yes, Paramount Plus was already a subscale streamer with only about 70 million subscribers. Peacock is even in worse shape with only close to about 40 to 45 million. So this really kind of puts tremendous pressure on them. And they really have to come up with some kind of strategy to, you know, fortify their businesses. Maybe they have to look at a potential combination.

3:39I don't know what it's going to look like. Geetha, we spoke earlier this morning to Jen Rhee. She covers all the antitrust stuff for Bloomberg Intelligence. And she suggested that this will face a very difficult regulatory review. What if that is, in fact, the case? What do you think Netflix would be willing to do to maybe get this deal done? Would they think about selling some assets here? They definitely could. So far, Paul, they're saying all the right things. They're saying everything that should assuage any regulatory fears. That said, I mean, you are combining the number one streaming service in the world with the number three streaming service.

4:17Obviously, a lot of red flags there, potentially. They are, however, saying that this is going to be good for consumers. It's going to provide more consumer choice. It's actually going to lower costs for consumers because, you know, they're going to be able to sell a bundle of HBO Max with Netflix potentially lowering costs by, I don't know, 30, 40 percent. So that's one thing they're saying. The second thing where there was obviously a lot of concern and not just from regulators, but also from Hollywood content and Hollywood moguls would be that, you know, Netflix has typically been very anti theatrical.

4:48So they talk always about day and date releases, how, you know, movies should be released directly to streaming. And so obviously there's been a lot of backlash from the exhibitors, from the theater, from the creative community. But Netflix, again, kind of placating everybody, saying that they are going to continue the Warner theatrical strategy by continuing to release those 15, 20 movies year after year in the theaters. And the last thing that everybody has been worried about is we have to remember that Warner is actually a huge content supplier. So they supply all of these big shows. When you think of Dead Lasso on Apple TV, that's a Warner show.

5:24So, you know, again, are they going to pull? The big question is, is Netflix going to pull back on all that content? And just this morning, Ted Sarando said on the call that, no, we're not. You know, Warner Studio is going to continue to do whatever it has been doing. But again, you know, not really sure how that's going to work for Netflix if they just continue to do that. But so far, they're saying all the right things from a regulatory standpoint. So from a consumer experience standpoint here, if it's Netflix and they've got Warner Brothers Discovery here, we're thinking about HBO Max and things of that sort.

5:56Essentially, are you going to maybe see some sort of merger of experience when you go onto Netflix? You're also accessing HBO or will it be more of a bundle mindset here? Yeah, so that is what has been really difficult to parse out, Nora. So they were asked this question again repeatedly in this morning's call. Is HBO Max kind of going to be like one of the tiles that you would see on a Disney Plus? radio go and you see Pixar and Marvel and is HBO going to be something similar to that? Or are they just going to continue to run the two services completely independently? If you kind of run the math, it just doesn't make sense for them to have two separate streaming platforms because you have all of the overhead expenses and the corporates and all of that to accompany that.

6:36So that doesn't really make sense. I think at some point they basically fold in HBO Max, all of that content onto Netflix, although they haven't necessarily clarified that. But I think that, you know, basically helps them from a cost perspective, helps them from a content perspective, and then really helps them with engagement, which is really what they're looking for. Deepen engagement on the Netflix platform. How do you do that? By increasing the amount of content. So I think eventually that is the game plan. But again, no specifics from the Netflix management team just yet. Stay with us. More from Bloomberg Intelligence coming up after this.

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8:07you're listening to the bloomberg intelligence podcast catch us live weekdays at 10 a.m eastern on apple carplay and android auto with the bloomberg business app listen on demand wherever you get your podcasts or watch us live on youtube big deal of the day netflix acquiring warner brothers discovery uh what's the regulatory framework are the regulators going to take a look at this deal this is a monster deal in terms of dollars you know 80 billion dollars of enterprise value. Let's check in with Jennifer Reed, Bloomberg Intelligence, senior litigation analyst. So, Jen, this is a big deal. How are the regulators going to view this?

8:44It really is, Paul. And I think and we've seen a lot of opposition to it coming out already. I think it's going to get really significant scrutiny, not just in the United States by the Department of Justice, but likely also in Europe and by the UK and possibly some other jurisdictions as well. But, you know, they're going to look at these overlaps, which in this case are both horizontal. That's in streaming. They both provide street, both companies provide streaming services, but they're also vertical. You have a big streaming service buying a big movie and TV producer and a big content, a library of content.

9:18And that creates a vertical issues. And when a company is really strong in both levels of a supply chain, when they vertically integrate this way, that can raise concerns too. So the Department of Justice is going to have to dig into both of those issues. And last Paul, I'll say this because we haven't seen very much about it, but there's also what we call a monopsony concern here. Monopsony is when there are a merger results in too few buyers of a service or product. So in this case, you've got two huge creators of scripted content that are coming together, and that could have a negative impact on the artists, the production people, the writers that go into making all the TV and movie content that the companies make.

9:59Jennifer, walk us through what exactly happens to the deal if the DOJ or regulators more broadly decide to push back on this. Sure. So there are a couple of different things that can happen. I'll start by saying this in-depth investigation usually starts by issuing what are called second requests for information. Those are like really big subpoenas where they're going to get a lot of business documents, a lot of data and information from the companies. Now, once the DOJ has looked at all that material, they have to decide either they clear it outright, they clear it with the negotiated settlement with the companies, or they sue to try to block it in trial.

10:32A negotiated settlement could mean agreeing to divest a product such as HBL Max and or agreeing to behavioral remedies such as making promises about the way the post-merger firm will behave in the marketplace. But if something like that can't be agreed upon, then the only thing the DOJ has left to do is go to trial and seek a permanent injunction from a judge that blocks the companies from closing the deal. They did that when AT &T tried to buy Time Warner several many years ago. But I'll contrast that to when Comcast bought NBCU. They also had some concerns there, but they entered a settlement agreement with respect to that deal.

11:11Jen, politics. I think politics is going to come into this deal maybe more so than some others here. Generally, I guess on the one hand, we have an administration that presumably is more open to consolidation across industries, taking a lighter touch. But then there's also a president who makes it personal oftentimes. Do we have any idea how that might shake out? You know, Paul, you're exactly right. And it makes it so hard nowadays to actually really do a true antitrust analysis of a deal because we have seen the Department of Justice and the Federal Trade Commission, I could say, aligning with the Trump administration in antitrust outcomes for deals and pushing the policy priorities of the administration and listening to what the president has to say.

11:55So where the president and the administration is against a deal is a higher risk, I would say, of that deal having to defend itself in court and the Department of Justice seeking a block. But on the other hand, Paul, we don't really know what's going on behind the scenes. You know, we've seen some of these companies to mergers hire some Trump-aligned lobbyists, powerful people in Washington that have helped them to push through the deal. That was the allegation with respect to the settlement the DOJ entered when Hewlett-Packard bought Juniper. We don't know what other kinds of concessions or agreements are being made.

12:28You know, this is all sort of the backroom channels. And without knowing that, it's hard to understand where the administration may come out months from now in the end on the deal. But at least for right now, we know that the administration doesn't look happy about this buyer. They would have preferred Paramount. Stay with us. More from Bloomberg Intelligence coming up after this.

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14:09you're listening to the bloomberg intelligence podcast catch us live weekdays at 10 a.m eastern on apple carplay and android auto with the bloomberg business app listen on demand wherever you get your podcasts or watch us live on youtube we did get some earnings out of hewlett-packard enterprise that's ticker hpe we did see that this essentially disappointed what investors were looking for here we did see the company gave an outlook for sales in the current quarter that fell short of the high expectations, particularly for its AI server business. And we've got the best person to help us break this down.

14:42We're going to be chatting with Bloomberg Intelligence Senior Tech Analyst Wu Jin-ho. He's coming to us out of Princeton, New Jersey. Tell us a little bit about what you took away from this earnings report. Yeah, thanks for having me. So I actually liked it. I know there was a high focus on the revenue numbers for the upcoming quarter. But EPS, they actually raised the EPS guidance from$2.20 on the low end to$2.25 and$2.40 on the high end to$2.45. So essentially, the strategy that Antonio Strait laid out with the Juniper acquisition is working out as planned. It is cushioning some of these higher commodity costs and the higher AI mix.

15:24So despite the disappointing 1Q sales outlook, the overall year should be fine. So the company's talking about, you know, substantial interest in its AI servers and they call out governments. And that's kind of new for me, at least. I guess I'm kind of used to talking about the hyperscalers, whether it's Microsoft or Amazon. Talk to us about maybe other categories of people that may be making some AI investments in servers. Yeah. Hey, Paul. So let's let's think about the sovereigns. Let's think about the Saudis, the US, the US federal government. They are going to start ramping up their own AI initiatives as well.

16:07The Department of Energy, Department of Defense, they're customers of HPE's Supercompute, and they're going to convert from supercomputing to AI servers as some of these configurations start rolling out. They already, you know, HPE already has some agreements with the Saudis. But, you know, and that's one of the issues with HPE's outlook. It's more on the timing of when these deals are flowing through. It's being pushed out more towards the second half of the year versus the first half. But they are going to play a much more meaningful role in the future, not only for HPE, for Dell and Supermicro as well.

16:47So how are they doing in terms of comparison to competitors in this market? Well, I mean, you know, HPE has made the strategic intent on not going after these lower margin AI server deals. If we look at some of the competitors, the way I have Dell modeled out, they're going to do roughly about$40 billion in AI server revenues. Supermicro around a similar level. HPE for next year is probably going to do roughly about$5 billion in AI server revenues in fiscal 26. Now, look, that$5 billion is nothing to sneeze at. But, you know, relatively speaking, it's going to be much smaller in scope and scale.

17:32Why are they smaller? Why are they lagging? And is there a plan for them to kind of narrow that gap? Yeah, you know, I found that to be disappointing in terms of lagging. I do think they have the assets to do so. But at the end of the day, the management team at HPE is very focused on shareholder and shareholder value. These AI server deals are very low in margin and highly competitive. So they're not chasing after these lower margin deals. And one of the strategic reasons on why HPE is going after these sovereign deals is because they think it's going to be higher in margin. And hopefully that does pan out for them, which is one of the reasons why that, you know, we're talking about one fifth the size of the deal flow for them.

18:19So outside of HPE, what else are you really keeping an eye on right now in this tech space? Well, the AI play is going to be pretty important. But I will tell you, the DRAM story is actually going to start materializing as a potential headwind for all of the hardware space. One thing that we didn't discuss on HPE is the 300 % rise in DRAM prices is going to affect their server sales. They think they're going to pass that through to customers. I'm a little bit skeptical, but I think the rise in commodity costs and DRAM is going to be the new tariff story in 2026. that's going to affect a lot of these hardware vendors.

19:01Why are DRAMs up so much? AI, AI, AI. You know, the hyperscale cloud guys are sucking up so much of this memory, and the DRAM vendors aren't raising the capacity. So when demand is tilting over one way, and some of the standard DRAMs, they're not producing as many DRAMs, and the capacity is not growing, there's nowhere else to go for the price to go higher. I mean, when we think about AI and we're talking about HPE right now in particular, are expectations just too high? Are people putting so much pressure on these companies and we're seeing these, you know, these estimates and we're not really seeing them delivering?

19:40Or what's your read on that? Well, so let's talk about HPE in particular, right? You know, the way I wrote my earnings outlook commentary was it depends on the lens that you look at, right? from a sales lens, the AI sales did disappoint, right? But if we think about it from an earnings and a cash flow lens, the networking business actually did as well as it should have. And it's doing the work that it's supposed to be doing in terms of cushioning some of the lower margin in business. And quite frankly, I still think that there's potential for earnings upside if networking execution strengthens going into the rest of the year.

20:22Stay with us. More from Bloomberg Intelligence coming up. after this. Bloomberg Invest returns to New York on March 3rd and 4th, where the sharpest voices across banking, asset management, and private capital will discuss the forces reshaping finance. Powered by Bloomberg's Global Newsroom and data from the Bloomberg Terminal, this flagship summit will cover everything from AI-driven disruption and central bank policy shifts to the emerging risks and opportunities in private credit. Join the conversation and register today at bloomberglive.com slash invest. You're listening to the Bloomberg Intelligence Podcast.

21:02Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's switch gears and dig a bit into the industrial space. I mean, just last month, we had fears of a government shutdown continuing and we saw it was the longest government shutdown in U.S. history. But this did drag on a lot of the major airlines. And we have a wonderful person to discuss this here with us today, George Ferguson. Of course, he's Bloomberg Intelligence Senior Aerospace Defense and Airlines Analyst.

21:33And we want to chat a bit about what's going on in terms of Southwest earnings and how government shutdown actually weighed potentially on this company here. George, what is your takeaway here from what we're hearing from Southwest? Yeah, I mean, it was a little bit more than we expected. I think the impact was about$200 million dollars on the quarter. It was in line with what Delta Airlines had reported. We thought, you know, perhaps Southwest a little bit less impacted as they're not as heavily into the sort of the high volume airports. You know, and actually, I think I was a bit surprised as well that they talked about the booking curve.

22:11We think most people, you know, typically book well before the holiday season. So we wouldn't have expected their booking curve to be as impacted. But I mean, again, I think it's largely in line with what we expected. A couple hundred million dollar hit. I don't think it'd be it's not going to be terrible. Stock is up 4.6 percent today, 52 week high for Southwest Airlines. So, George, what's the I know you either have published or working on your 2026 outlook here. What's kind of the call for the airlines in the next six to 12 months? Yes. I mean, as we look at, you know, 2026, we get it like visibility about six months worth of schedule.

22:50And, you know, we've already started to look at schedules for the new year. So in the first half of the year, the domestic business appears to be growing. The domestic capacity for U.S. airlines is growing, you know, around GDP-ish to two and a half percent. And we see less of that growth in the low cost airline space. Now, Southwest is in the middle of migrating between, I don't know if I'd call them low cost, I call them budget. They're in the middle of migrating from budget to an airline that's going to offer premium seating and some premium services in the new year. So it looks like there is a, not a restructuring, but an adjustment underway.

23:35Again, in that budget low cost world, there's going to be less growth than you're seeing in the full service, the trend we've seen here in 2025. So we're thinking that premium seeding, full service seeding could be a bit excess and could see continued push on the unfairs. We're thinking budget ought to get a bit better. We were projecting kind of a 3 % increase in Southwest yields originally before the government shut down. Now we're kind of thinking 2.5%. I mean, that's really not bad for 4Q. So again, we think that sort of carries into the new year. Another big issue in the new year is going to be a lot of the U.S.