Paramount Makes $108 Billion Hostile Bid for Warner Bros

0:23You know, you wait five more minutes and there's going to be a new headline here on Paramount Skydance versus Netflix for Warner Brothers. But we know that this will be a deal that takes a long time to resolve. You know, there are differences. You know, the Paramount deal is all cash and it is for the entire company. So those two things make it much, much cleaner than the Netflix one, which includes twenty seven seventy five in cash, plus four dollars per share in Netflix stock, which has historically been a great thing to own. But it's contingent upon the separation of the Warner brother separation of its cable networks which was the plan all along planned all along and they've already done a lot of work on it um and then so the value the value total value seems pretty darn similar it's just probably going to come down to who has a cleaner path to approval and you know you could do that math we talked to jenry and it's that math is pretty darn straightforward but now we have the added uncertainty which we historically have not had an mna of you know we This is becoming politicized, you know.

1:26Absolutely, because we'll see. Pyramount Skydance, controlled by David Ellison, son of Larry Ellison. The Ellisons have a very good relationship with President Trump, with the White House. And so they have made the argument implicitly or explicitly that this deal has the president's blessing. So therefore, it will go through more easily. Whereas we know that there's a lot of concern here about Netflix and its bid for Warner Brothers Discovery assets, not even the entire company here. And it all depends on how you define the streaming market, whether it includes YouTube or not. So there's a lot here to get through.

2:02Let's bring in Chris Palmieri, Bloomberg News Senior Editor and Entertainment Team Leader on this deal. Chris, just give us a sense of what people in L.A. are saying, because most of these businesses take place in L.A., maybe not as much as they once did. And I'm curious to get a sense of how the industry is thinking about it. I can tell you, I was having dinner Saturday night at a Thai restaurant with the family. And my daughter's friend is 17. She goes, Netflix is buying Warner Brothers? I mean, this is just one of those things that just is shocking to everybody, but particularly to people that work in Hollywood.

2:38It's been a really tough few years. We've seen, you know, so much consolidation in the industry already. and job losses and movies and TV shows being shot overseas and strikes. And just the promise of another big merger like this is just, you know, people are really unhappy and in shock. Chris, is there a feeling? It seems like if Paramount were to acquire Warner Brothers Discovery, there would be more overlap, therefore more jobs at risk. Is that the correct way to think about it? Yes. Although, you know, both acquirers and Paramount and Warner Brothers are trying to downplay, you know, the job loss is part of it.

3:22Netflix did say they looked at two to three billion dollars in annual savings, much of that basically in overhead, you know, redundant jobs. But they were each trying to make the case that their merger would be a little bit less worse, I guess you could say. Just a quick note here. We have a correction to make. The Bureau of Labor Statistics will now publish the October and November PPI data together in January. I mean, the net effect is at the end of the day, Paul, all this data will come out after the Fed's meeting this Wednesday. Hey, Chris, Paramount owns the Paramount movie and television studio.

3:59Warner Brothers owns the Warner Brothers studio. Is there a is can you put those two things together there from a regulatory perspective? them? Well, what they're doing is they both said, both Paramount and Netflix have said they want to kind of maintain the creative executives working separately at Warner Brothers. Warner Brothers has had a phenomenal TV business. One of the issues for Netflix is that historically Netflix has produced just stuff for Netflix. But they have said they will continue the policy of Warner brothers making shows for other people uh you know and and they do you know have had a huge track record of that historically uh so that's one of the things paramount also has said it would keep the warner brothers creative team together all right i'm not sure i believe that um i would argue just from my own perspective chris i'm wondering what the folks in in la are thinking this is kind of a more of a must-have for paramount skydance versus netflix it's a nice to have do you think that's accurate um yeah i you know i think if you just look at the public comments uh from the two netflix co-ceos you know greg peters was initially kind of dismissive of media mergers and and was really throwing cold water on this idea so i i think that the the idea that netflix is that all in uh is is you know is definitely a legitimate one uh you know paramount i i i think i'm you know Mike Moffitt-Nathanson put out something over the weekend saying, and I think this is true, Netflix has been the winner historically.

5:38And so if you want to find a home, best home for your outstanding intellectual property, Batman, Harry Potter, Game of Thrones, on and on, they're the ones that are going to get it all around the globe and invest it in all that. Putting two struggling companies together raises more issues. Everyone always sort of seems to suggest that in almost any industry, but it doesn't always translate into outperformance. Chris, this deal, no matter who wins out, Netflix or Paramount Skydance, will take a while to resolve. There's going to be legal challenges. There's going to be antitrust regulators looking into it.

6:14What does that mean, that long lead time mean for Warner Brothers' ability to just do business and be the best performing studio it can be in the meantime? It hurts it. I mean, As I put out on a note last week, the CEO of Warner Brothers saying, everybody just focus on your work and listen to your business leader. This is going to take a while. But you don't even have to look very far or very long to find out if you remember, you know, the challenges AT &T had when it bought Warner Brothers a few years ago. There was an extended, there was a lawsuit by the Justice Department, really extended time to close that deal.

6:48You know, many people believe that it held the company back in terms of, you know, launching its own streaming service and and, you know, investing in the business. You know, I don't see Warner Brothers core business helped by an extended regulatory review that really either bid or Paramount or Netflix would face. Stay with us. More from Bloomberg Intelligence coming up after this.

7:16you'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 all right the warner brothers discovery deal just got a little bit hotter here today we have a over-the-top hostile bid from paramount sky Skydance, whatever they're called these days. That is for the entirety of the company. This is going to come down to regulatory hurdles. That's going to be one of the key, key issues. So for that, we turn to Jen Rees. She covers all the antitrust stuff here for Bloomberg Intelligence.

7:52Jen, does one potential buyer, Paramount, Skydance, or Netflix, does one have a clearer path to regulatory approval? I think absolutely. I think Paramount has a far clearer path to approval. I mean, if you just think about them in terms of the streaming overlap, And when I talk about streaming, I am talking about a narrow market for just streaming services and not a broader market that might include YouTube. They are much smaller than Netflix. And so when you combine HBO Max with Paramount Plus versus combining HBO Max with Netflix, it creates far less of a problem. You know, and looking across at the creation of original scripted content, let's say that's a market that the Department of Justice looks at.

8:31Again, the combination is smaller than the combination of Netflix with Warner. And then you have the added cable channels. So Paramount has cable channels. Warner has cable channels. Netflix would not be buying those. So that is an issue that arises in the Paramount situation and not Netflix. But I do think if there's any problem there, that's easily resolvable. So in my mind, Paramount's the better buyer from an antitrust perspective. I'm curious about the termination fees involved in this deal. Netflix says it'll pay a termination fee of$5.8 billion if the deal fails. That seems really large.

9:03Paramount Skydance's offer includes a$5 billion termination fee. Just talk a little bit about the amounts involved there and what the fact that, well, at least to me, it seems pretty large, says about what each side thinks of the possibility of this going through or not. Relatively speaking, it's a very large termination fee. You know, you usually see these as 2 % or 3 % of the purchase price. And Warners had to do that when they negotiated this. I mean, there is a high risk, right, that a Netflix deal would ultimately not get done, that they could get sued in court, that they could lose in court.

9:31it would break up. So they need to be protected because their business is just frozen for two years, practically. And it does impact a seller's business, right? To kind of be in limbo that long. And that's what the termination fee is meant to do. Now, I think they have far less of a problem with Paramount, but you never know. And so I think to protect themselves, Warner would have wanted to work that in and Paramount wants to give that kind of insurance in case there's some problem there, too. Now, OK, so what are the next steps here? If I'm the board of Warner brothers discover. Do I have to respond to this thing?

10:06Well, it's a hostile takeover. So they're going against the board's wishes. Basically, we know what the board wants. The board seems to prefer Netflix, even with all the antitrust risk it brings. So now it's just going to depend on what happens here as they go forward and they solicit the shareholders. I think the deal that would get done more quickly and has a surest path would be the Paramount deal. So if Warner's interested in getting something closed within the next year, I think Paramount would be the company that they'd go with. I don't see them getting a Netflix deal closed in the next year.

10:40Let's talk about the politics part of this. Axios is reporting that Jared Kushner is helping to finance Paramount's bid for Warner Brothers Discovery and that Axios is citing a regulatory filing on this Kushner financing bid. Does that put it in a better position because Larry Ellison has a good relationship with President Trump, Jared Kushner, the president's son-in-law is involved here, even as Larry Ellison tells other media that if he feels that the deal was inherently biased towards Netflix? Well, I would say if things were conventionally done, then it shouldn't. It should be all about antitrust.

11:15It should be the analysis, the economists and their assessment of the markets and the impact on the markets. But in today's day and age, there is an impact from politics and the administration does seem to kind of micromanage these decisions. And so I think politics is a significant factor here right next to antitrust. And from what you just told me and what we've read, it seems paramount's the favored bidder by this administration as well. Stay with us. More from Bloomberg Intelligence coming up after this.

11:47You'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. One thing we didn't get to is the credit market. And of course, we've seen yields. We've seen spreads really, really tight, even as we've seen a lot more supply come into the market because of all the spending on AI. And there's going to be even more spending in 2026. So let's bring in right now Stephen Flynn. He's a senior credit analyst at Bloomberg Intelligence.

12:22And Stephen, we want to really dig into Netflix because as part of this bid for Warner Brothers Discovery, it's going to be getting a$59 billion bridge loan, the biggest investment grade bridge loan in a while. And of course, that means eventually that will be replaced by corporate debt as well. How are you thinking about what kind of market impact that will have? Well, first of all, let's start off. Netflix is a very strong credit. So Netflix has a significant market cap. It's, you know,$425 billion or so. The company has growing revenue, growing EBITDA, growing free cash flow. Its net leverage ratio is very modest, talking 0.4 turns of leverage.

13:00A company generates a ton of free cash flow. So Netflix is a very strong credit. It's rated A3A, so they have the ability to borrow. So within that$50 billion that they have as acquisition debt, there's been reported that$25 billion will likely be bonds, and the remainder will probably be a combination of term loans and maybe some other borrowing. And while$25 billion sounds like a lot, if we think about Netflix bonds in the market right now, they're relatively scarce, right? So if Netflix is part of communications, you think about borrowers like AT &T, Verizon, Comcast, T-Mobile. Those companies have huge debt loads and are large parts of the investment-grade corporate bond index.

13:35So Netflix is relatively small, so I think that there could be a lot of interest in Netflix bonds. So I don't think it's a problem at all. And then the news of the day here, Paramount coming back over the top with a hostile bid for Warner Brothers Discovery. They're talking about$54 billion of debt commitments from Bank of America, Citi, and Apollo. So again, your market is going to have a lot to say about how this deal gets done, isn't it? Yeah, and this is a completely different story, right? So Netflix, sorry, Paramount, Skydance is on the edge of investment grade. So the investment grade by Moody's and Fitch, high yield by S &P, if you add you know they're talking about the combined company could have about a hundred billion dollars of debt so if we look at the debt loads at both um paramount skydance and warner brothers you're talking about an incremental 50 billion dollars yes they have a you know 54 billion dollar commitment um you're talking about pro forma net leverage of over five times and that's including synergies right so that's going to be much tougher you're talking probably a good chunk of that will be high yield.

14:39And that is a lot for the high yield market. Now, the high yield market is very strong. Issuance is up. Yields are down. I think, you know, it's the high yield market is very favorable, but this would probably be the biggest name in high yield. The biggest name in high yield right now is charter. So charter unsecured bonds are the biggest name. There's about twenty five billion dollars market value for charter bonds in the Bloomberg high yield index, depending on how they set it up. But this could easily become, you know, the biggest name or close to it so that makes it much tougher now we have to see all the details but um so if i'm a shareholder warner brothers discovery a the regulatory aspect which generally just walked us through yeah but now i've got this sitting there if i'm an equity shoulder do i want to be sitting there with a balance sheet of five times leverage well if you're a warner brothers shareholder you getting cash right so you could argue that you don't care but if you're a paramount shareholder yes you have to be concerned that the pro forma company will have a significant amount of leverage and that is a big name in high yield.

15:35Wow. But you just, you know, they also have big backers behind them, right? Between the Ellison family and Redbird Capital. Paramount Skydance stock is up 5 % today. Yeah, well, I mean, but this is not going to end anytime soon. This is going to drag on. So, Stephen, media companies being heavily indebted, what do we know about the appeal of this sector to investors? I mean, I think about Warner Brothers' discovery when it came into being. It took on a lot of debt. David Zassoff spent years trying to pare that down. Yeah, and he was unsuccessful, right? The company was junked, and they ended up doing a massive tender offer where they put in a lot of secure debt ahead of the existing bonds and then used that to tender for existing bonds at a discount to par.

16:14So bondholders really got hurt then, and then the company was junked. So it's been tough. When you think about communications in general, people feel a lot more comfort lending to more traditional communications companies like telecom, cable. You have hard assets. It's a little bit easier to lend to. It is a little bit tougher in media. So this would be a large name for media. What's Paramount's, does Paramount have a view? Like, does a marketplace have a view on Paramount? Well, Paramount, it's not a very large name and it is on the cusp of IG. It trades very wide for IG, but that's because it's on the cusp and there's fears of a certain deal like this.

16:51Now, there's two sides, right? You have the positive of the Ellison family and Redbird coming in and saying, hey, there's support there. where I know we have somebody that's backing us. Things can't get too bad. And the flip side, the business is challenged, and there is a risk of high yield. I mean, back in my day, for this kind of deal, and your high yield market, five phone calls, I would get a sense of whether this deal could get done. Is it still like that today? Yeah, sure, if you call the right people. That's right. And I knew the people to call, and they would say, I don't think so, Paul.

17:22I don't think we can get this. Well, speaking of the right people, Jared Kushner is part of this Paramount hostile deal bid for Warner Brothers Discovery through Affinity, the firm that he runs. So there's all kinds of political considerations as well. How do you anticipate Warner Brothers Discovery bonds to trade in the meantime? And what does that look like? Well, they've been very volatile, right? So if we go back a couple of months ago when they got junked and there was the big tender offer, the bonds were crushed. They were trading at large discounts to par. Then they've had a nice run over the last couple of months with all the speculation of being bought out.

17:55Now, the Netflix deal happened, and the existing bonds appear to be left behind with the global networks business, which is somewhat deteriorating. So the bonds traded off a little bit on Friday, and then now coming in with having Ellison and Redbird behind you, that's giving a little bit more of a lift. But they're likely to remain very volatile. Stay with us. More from Bloomberg Intelligence coming up after this.

18:20you're listening to the bloomberg intelligence podcast catch us live weekdays at 10 a.m eastern on apple car play and android auto with the bloomberg business app listen on demand wherever you get your podcasts or watch us live on youtube ibm buying confluent for 9.3 billion dollars in cash or 11 billion dollars if you include debt anorg rana is bloomberg intelligence's technology analyst and he joins us now. So Anraag, what can you tell us about how this fits in with IBM's ambitions? In particular, it's AI ambitions, which it's really been repositioning its business around. IBM's done a very good job since the acquisition of Red Hat.

18:57Not only did they pivot and move towards software, which is a much higher margin business, they actually have margin improvement because the gross margin of those businesses is very high. Since then, they have bought a number of companies, HashiCorp, AppTO, and now Confluent. The big thing what we want to think about over here is enterprises do not always go with either AWS or Microsoft. They do look at open source as a way of building their infrastructure. Confluent specializes in open source streaming data platform, which is when you are looking at real-time data, whether it is you know, something that comes from a telemetric device or even transactions that are happening at a retailer or a bank, you can ingest that data directly into your system and then make sense out of it.

19:46Now, that's going to be helpful as enterprises infuse more AI into their applications. So strategically, smart move, financially also a smart move. Red headline crossing the Bloomberg terminal, the BLS to not publish October PPI data. Which I believe makes sense, given that, if I recall correctly, the BLS already told us that it's not publishing October jobs or CPI data either. Right. That's kind of what we heard from a lot of economists. We'll talk to Mike McKee about that. Yes, absolutely. That's coming up. All right. IBM. This is, as a kid, IBM was technology. That was the impitom of technology.

20:21Then the Internet came along and they kind of missed it. So you didn't think about them a whole lot. Now, if you put up a stock chart, over the last five years, the S &P has compounded at about 15 % per year. IBM, over that time frame, 26 % per year. Anurag, what is the turnaround of this aircraft carrier over the last five years? As I said, I think it is the acquisition of Red Hat. I think the CEO has done a very good job of blending that particular, you could say, operations within their services platform. Because when you think about the IBM prior to that, it was very services heavy. That's a business that has 40, 50 % gross margin, not as profitable as software businesses.

21:02By being open, by going out and buying software businesses, their financial profile has changed, their cash flow has changed, and I think it's more stable in nature. They're still not at a point that their sales growth is going to be in double digits, but they are inching towards their target, and it may be two to three years before they get there. So Anurag, what's interesting about this particular acquisition is IBM is definitely making inroads or greater inroads into AI, but this is not a data center driven acquisition. What do you think that means in terms of the next stage of M &A that we're going to hear from the tech industry when it comes to taking advantage of opportunities in AI, but not necessarily buying AI data centers?

21:43You see, everybody has their own strategy, what they are focusing on. IBM, luckily, and it's good for them that they don't want to be in that capital-intensive, heavy data center business because this is a company that generates, let's say,$14,$15 billion in free cash flow. They can't go out and expand into a data center space where the capital investment is multiples of that. They are doing the smart thing of buying software companies that are not capital-intensive heavy. when you are going out and creating a new application, you know the raw material, you need the raw materials to create or embed that.

22:18And that's where they are focused on. And I think for what they do, it's a very smart place to be in. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, Tune in and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.