Warner Bros Reopens Talks as Paramount Signals Higher Bid

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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 Tuesday, but there's still a lot of M &A to talk about. Merger Tuesday. Yeah, Merger Tuesday. Although this one's been like in the works for so long now. Warner Brothers, Paramount, Netflix. Looks like Warner Brothers is now open to a Paramount bid. A little bit more open than it was before. It is reopening talks with Paramount as Paramount signals a higher bid but has not actually raised its bid.

1:45I'm glad you reported it correctly because they haven't raised their bid. No, they haven't. They said, you know, we could. So I guess that's good enough for them to reopen discussions. Stephen Flynn is our senior credit analyst on this developing story. So, Stephen, how are you looking at this development? it. Yeah. So you think back a couple of weeks ago on February 10th, Paramount actually came out. They reiterated a$30 per share cash offer for the entire Warner Brothers Discovery. But they did add in a few other things. Number one, they said that they would pay the$2.8 billion termination fee that Warner Brothers would owe Netflix for breaking that deal.

2:17They said that they'd help with the$15 billion of bridge loan that Warner Brothers has outstanding from a bond tender deal that they did mid last year. They'd also fully reimburse Warner Brothers Discovery for a potential$1.5 billion fee that Warner Brothers could owe certain bondholders if they do not do a debt exchange by the end of this year. So this is a complicated story that keeps getting more and more layers of complexity on top of it. Remind us, Steve, if Paramount were to win this deal for Warner Brothers, this would be a very highly indebted company. You guys don't like that, do you?

2:56Correct, yes. So Warner Brothers Discovery would have about$85 billion of total debt pro forma for this deal, a combination of Paramount and Warner Brothers, right? So Warner Brothers has about$31 billion of debt. Paramount has about$15. This deal would add about$39. So you're talking about$85 billion. If you just look at the combined EBITDA for both Warner Brothers and Paramount for 2026 combined, they're about$12 billion. You know, just basic math. You're talking seven times leverage. That's obviously huge. But Warner Brothers, Paramount, expect about$6 billion of cost synergies. So if you give them credit for that, that gives you about$18 billion of EBITDA.

3:36It still gets you well over four times. Your credit guys never give synergy credit. You guys are pretty stingy. Well, yeah, we can give it, but we give you a certain amount of time to actually show it, right? And this is really important because what will the rating agencies do? And for the$54 billion of debt financing that they have in place to support this deal, to what extent will it be ahead of the other debt through either guarantees and or security? So if you could argue that it is ahead of all the other debt and you give them pro forma credit for the synergies, you're talking about three times leverage through that$54 billion, which could potentially get you IG credit ratings.

4:14So if we look at Charter as a comparable. So Charter, for many years, had a total net leverage target of four to four and a half times, but they had a split capital structure. The secured bond debt was IG. The unsecured debt was high yield. And the secured debt, they kept that a little bit over three times. And so if you use that as a comp and give them credit for the synergies, you could say that. Well, there's a lot of ifs there. Yes, there is. There's a lot of ifs there. Plus, I like Charter's cash flow better than I like. Yeah, but, you know, ProForm and Paramount, Warner Brothers should generate a lot of free cash flow.

4:47And they, you know, they should, I assume they will commit to use all that to reduce the debt. And typically, grading agencies will give the company a few years to kind of hit their targets and show the deleveraging. So Warner Brothers, when it merged with Discovery, also took on a lot of debt. How does this potential Warner Brothers and Paramount debt profile look compared to what Warner Brothers looked like after it merged with Discovery? So in total, when thinking about the leverage, it's not too different, but let's hope that this works better, right? Well, that's the question, right? Last time it didn't work so well, and Zaslav was kind of just preoccupied with bringing down the debt for years.

5:23Correct, correct. So when they merged Discovery with Warner Brothers, they purchased it from AT &T, effectively, and it had a high leverage, and they promised to delever, and it did not delever as quickly as anticipated. So then that's when last summer you had the whole announcement of the split and they decided to launch a tender offer where they got some new financing in place and told the existing bondholders, we'll buy the bonds back from you. But, you know, you're taking some pretty big haircuts to the amount that you're owed and they still had very good participation. Stay with us. More from Bloomberg Intelligence coming up after this.

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7:04you'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 anthropics pbc talks about extending a contract with the pentagon are being held up over additional protections the artificial intelligence company wants to put on its clawed tool. Absolutely no idea what that means. Mandeep Singh does. Mandeep Singh, Global Tech Research Head for Bloomberg Intelligence. What's going on with our friends at Anthropic? Because I know they do a lot of work with the U.S.

7:39government. Yeah, and look, I think Palantir is the company that really made a name for themselves in the kind of work that all these LLM companies are being tasked to do for the Department of War. Yep. And look, it's going beyond analytics now. So what Palantir did was you could look at unstructured data, like the GPS coordinates, tie intelligence in terms of finding about some source or some entity. And that was heavily used in a variety of use cases. Now I think these LLMs are trained on, we know, 15 trillion tokens. and they can ingest large amounts of data and do analytics at a level that we have not seen.

8:27So in this case, the company Anthropic has talked about their AI constitution or in other words, putting guardrails around the kind of surveillance activities they want the LLMs to do. And obviously from a government perspective, they want to do whatever it takes from a national security perspective. So I think that's where there is a discussion going around the kind of guardrails that they want to see and the level of, I guess, work that the government wants them to do. Okay, so the Department of Defense or Department of War, as it's now known, this relationship with Anthropic, it's not limited to just using Anthropic's models, is it?

9:08Because it wants to make sure that it's got kind of a wide source of AI, large language models to draw from. So what is that relationship like with, I don't know, ChatGPT or Gemini or even Grok? Yeah, all of these companies have a contract with the Department of War. And like, for example, XAI's Grok has a$200 million contract. So, you know, the department is using all the possible tools that are available. And from that perspective, Anthropic is one of them. But no one else like ChatGPT hasn't talked about, you know, guardrails in such a big way as Anthropic has. So that's the big distinction.

9:47And obviously, SpaceX is a defense contractor for the department. And now with XAI merger, I think they can do more work around the drone side. So at the end of the day, I think you have to think of it from a geopolitical standpoint. point what china is doing you know with that infrastructure and similar concepts and what i think the u.s defense uh is looking to do in terms of surveillance and national security interests and these llms will play a pivotal role because as i said they can help you find that needle in the haystack that the current technology uh wasn't able to do who is anthropic who are these people well they just raised 30 billion dollars in their latest funding round so they're good fundraisers And they'll most likely go public this year.

10:36There is a very high likelihood of both Enthropic and OpenAI going public. And that's why, you know, they're out there in terms of establishing the use cases and the utilities, not just a coding agent. They want to show, you know, that they are addressing a lot more areas in terms of, you know, where these models are touching and the companies that they are interfacing with. So there is a very high chance that we'll see IPOs. Stay with us. More from Bloomberg Intelligence coming up after this.

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12:10You'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. Let's switch gears to the health care space. And to do that on a Tuesday morning, we check in with Sam Fazelli, Director of Research for Global Industries and a senior pharmaceuticals analyst for Bloomberg Intelligence. He's based over there in London. So, Sam, I see that Moderna and Merck, they're working together on a melanoma drug here, cancer drug. What's the status there?

12:45Yes. So, Paul, thanks for having me back on. And look, they have a trial coming up, which is a very innovative approach to trying to treat cancer, i.e. I'm going to take a drug that releases your immune system. And at the same time, I'm going to give it stuff from your tumors so that you can recognize the tumors. So you've got a vaccine. That's what a vaccine is, right? And the immunotherapy drug, Ketur, that everybody's used to. And they've had some really strong phase two data that's come out. So what we've done here is that we've gone and have a look. That's one of the key catalysts for 2026.

13:19And everyone's waiting for this trial to read out as to what are the chances of or what are the issues that this trial might face. You know, that's our job, right? We look for problems, look for trying to measure up if there's any risk here. And we've identified three. One is that the phase two data wasn't as easy to interpret because the control arm in it, that initial data that looked great, didn't behave as we thought it should have done. The second issue is that in the phase three, they're enrolling some healthier patients. What is that going to, can you therefore use the phase two to bridge your thoughts to the phase three?

13:55And on top of that, here's an interesting part. Who makes COVID shots? Well, Pfizer, Biontech, and Moderna. Another study showed that if you use COVID shots within 100 days of one of these immunotherapy drugs in cancer patients, they survive longer. They have better survival rates. What if that happened in the Moderna trial? The control arm has COVID shots in it, and that lifts up the survival, if that data was correct. So all these things make us a little bit worried about this data coming. And of course, Moderna has other issues to deal with, which I'm sure you're going to come up to, which is that FDA rejection to accepting their file for the flu vaccine, which blew my mind, I have to say.

14:38Well, this administration doesn't like vaccines, period. So and it's been a brutal flu season. Right, Sam? I mean, it's not in kind. I mean, I think something like 22 million Americans have fallen ill to the flu. Yeah, they have. And to be like Scarlett, the issue is now they're deciding what flu vaccine to give us in the U.S. and Europe in a couple of months. They'll be decided in nine months time. That's nonsense. This is the flu. These are viruses. They change all the time. I think we've learned that. Right. Here's a technology that could have potentially enabled you, mRNA vaccines, to react much quicker, nearer the time when you know what strain you need to target.

15:16This could have been the approval that the world needs. I mean, in this world, we need to be able to deal with these infectious disease. We've learned our lessons, haven't we? Unfortunately, the person at the head of the division of the FDA, called CBER, made a decision unilaterally by the look of it. based on what people have reported, that he doesn't want to review this file. Moderna had all the right things in place. They had discussed with the FDA. They had this allowance to go ahead. They did a trial that's in line with other people's trials. It just doesn't make any sense. And I tell you what, that really worries me about any company interacting with the FDA.

16:01How can you know that you're not going to get a next week or six months or 10 months or 12 months down the road, a random rejection despite the discussions you've had? So how are these big health care companies, pharmaceutical companies, biotech companies, how are they dealing with the FDA? Because it seems to be a very difficult relationship at the moment. look paul only a week before we were talking about the fda showing its teeth when he came out and said hymns has to stop selling copycat drugs which it had no right to sell and now we have this this uncertainty is a problem and they're all trying to manage it the larger companies can manage it because they have teams of people uh etc but but it's the biotechs that suffer because they they have limited amounts of cash on a relative basis and we've had several of these things that have hit the block with regards to regulatory pushback, which you didn't expect to have.

16:56So it is a problem for the biotech sector more than the pharmacy. Stay with us. More from Bloomberg Intelligence coming up after this. I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week, we bring you fascinating conversations with the people who shape markets, investing and business. CEOs, fund managers, billionaires, Nobel laureates, traders, analysts, economists, everybody that affects what's going on in the market, whether you own stocks, bonds, real estate, commodities, crypto, you really need to hear these conversations. Sometimes it's behaviorists like Dick Thaler or Bob Schiller.

17:40Sometimes it's fund managers like Peter Lynch, Bill Miller, Ray Dalio. Sometimes it's authors, Michael Lewis, author of The Big Short and Moneyball. Regardless of the conversation, these are the folks that move markets each week. That's the Masters in Business podcast with me, Barry Ritholtz. Listen on Apple, Spotify, or wherever you get your podcasts.

18:07You'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. Let's switch gears here. Talk about the real estate business here in the United States. We can do that with Jeff Langbaum. He's the REIT analyst for the U.S. Is it all just data centers today, Jeff? Is that all people want to talk to you about? Because it seems like that's the AI play in real estate? Well, that's one way to play AI from a positive perspective.

18:41But right now, what people are thinking about is what the impact is going to be on office space. If AI makes all of these industries that lease office space irrelevant, what does that mean for demand for space? And we saw last week that it started with software and then it went to industry after industry and ended up with the real estate brokers and eventually the office REITs getting hit hard. So, so far, this is just kind of fear that's wafting across the market. Have we actually seen any evidence of this happening? Not yet. And in fact, we've seen some of the opposite. Leasing velocity has been at the highest level since before the pandemic in markets like New York and San Francisco.

19:25The REITs that we follow, names like SL Green, Vornado, Boston Properties, or now BXP. These guys are reporting very strong leasing volumes. We're starting to see occupancies tick up off the bottom in their portfolios. And one of the dynamics at play is that AI firms are leasing space as they grow. And to the extent that companies being impacted by AI start to recede a little bit, there's an offset there. So your office REIT stocks last week sold off on this fear? Yeah, and it's not a new fear. I mean, it's been it's been at play for some time now. You know, work from home kind of worked its way through and everyone kind of got comfortable with where hybrid kind of settled in.

20:15And then, you know, what was the next thing to hit office? And it was this. And it's been you know, it's been out there for probably a couple of quarters now. What is the impact going to be? But last week when when software rolled over, it just compounded. Is this something where because of the evidence that companies are still leasing quite a bit of space that we're going to see a just as sharp recovery? Well, that's possible. But, you know, there's also the risk that, you know, the the equity markets are turbulent and forecasting. Right. And so there is the possibility that there will be negative leasing news to come.

20:55It's certainly not showing up in the numbers now. And we do think and this is backed up by some survey work that we just did last week of office workers in both New York and San Francisco. We actually think that there's still a period of time to come where firms are actually leasing more space. They're expanding their headcount to try and figure out how to take advantage of AI and to grow their business. And that could actually, you know, I don't know about a sharp snapback, but it could prolong the positive vibes for some time. What's the sector of the REIT market that you like the most right now?

21:31Senior housing is is I mean, you know, it's it's the it's it's the one aspect where you cannot refute the demand story at all. And at the same time, where real estate guys typically love to build, to take advantage of those demand stories, there's not much senior housing coming out of the ground. So there's a huge supply-demand imbalance. Okay, but is senior housing more attractive in certain markets over other markets? How do you pick between winners and losers when it comes to senior housing? It's really more about the local operator than it is about the specific market. I mean, obviously, if you're in a place where, you know, the economics aren't as strong and you don't have as affluent a potential resident base, then that's going to potentially impact.

22:19But local, strong local operators, when there's not a lot of supply coming out of the ground and, you know, you basically just have an aging American population that is going to need housing solutions, it's really a play across the board. 30 seconds. Why isn't there the supply? The cost of capital is still a little bit elevated and it's tough to get. It's tough for developers to get capital and and underwrite new deals to make sense. Really? Man, you want to you want to start putting capital to work? Yeah, I'm sure there are developers who would who would take your money. This is the Bloomberg Intelligence Podcast available on Apple, Spotify and anywhere else you get your podcasts.

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