Warner Bros. Says Paramount’s New $31 Offer May Top Netflix

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1:31Drew Reading:Let's get to a little M &A in the media space. The Warner Brothers Discovery deal, the never-ending deal, seems like it's moving a little bit forward here. We got a higher bid from Paramount. We want to check in with Geetha Ranganathan. She covers all the media stocks for Bloomberg Intelligence. So Geetha, give us the latest on this Warner Brothers Discovery sale process. Where are we right now?

1:54Kristine Aquino:Yeah, so Paul, we got the higher number from Paramount. It's$31. So they upped it from$30 per share for the entire company. Now, what that has forced the Warner Brothers Discovery Board to do is to go back to the drawing board, kind of re-engage with Paramount, see exactly what number they can come up with. But ultimately, they have to deem whether this is a superior proposal or not. So far, they have two offers on the table, this one from Paramount and the$27.75 per share from Netflix. But that is only for part of the business. That's only for the studio and the streaming assets. So they're still in the process of making a determination about which offer is superior.

2:31Kristine Aquino:But the minute that they, you know, that they make that determination and they call the Paramount offer superior, then the clock starts ticking for Netflix. They have four days to come up with their own enhanced offer. So to match the Paramount offer and then, you know, we'll kind of see where the chips fall after that.

2:48Paul Sweeney:Yeah, well, Kitha, you know, I recall the Warner Brothers board really did not like some of the financing terms for the Paramount bid initially, right? So does this new improved offer improve upon some of those sticking points in the earlier deal? And does that really de-risk the transaction now that they've come up with another offer here?

3:10Kristine Aquino:They have. They have all of the points that Warner Brothers had initially raised. They have the Paramount management team has proposed remedies. So one of the big things that they have kind of come up with is that they're going to cover the financing costs and the termination fee if Netflix exits this process. They actually upped their own termination fee from$5.9 billion to$7 billion. They are going to pay something called a ticking fee, which is 25 cents per share per quarter for every quarter that the transaction does not close beyond September. So they've offered a lot of different things, including kind of backstopping the whole equity portion of the deal, as well as providing guarantees for the debt financing.

3:57Kristine Aquino:So a lot of the points that Warner Brothers had initially raised, you're absolutely right, Christine. you know, Paramount has kind of come out and address that. So definitely providing a lot more comfort to the Warner Brothers Discovery Board.

4:11Drew Reading:Yeah, you're right. It seems like Paramount's really stepped up and really said we're going to be really credible here. Meanwhile, Netflix has been quietly waiting on the sidelines, not really doing anything. But it now seems like now's the time for them to, you know, really make a decision, step up with a bigger, better offer, different offer, I'm not sure. What do you think the options are for Netflix?

4:33Kristine Aquino:The best option, in my view, Paul, for Netflix, and I think the majority of, you know, its investors would also agree is to just walk away. Pocket the$2.8 billion that you get in termination fees, just walk away and just focus on your core business, because they do have a very strong core business. You know, as we've said many times, Paul, and you agree that this, you know, Warner Brothers is a great asset. There's absolutely no doubt about it. But it is really just a nice to have, not a must have for Netflix. So it could end up actually becoming a distraction. So, you know, in many cases, I mean, I think the way that, you know, the street almost perceives that is that Netflix is a winner if they lose this whole bidding process.

5:15Kristine Aquino:But that said, I mean, they do have a lot of financial firepower. If they did have to increase their bid up it by about one, two dollars, they absolutely can do that. The only thing is once they go beyond that, then they kind of risk overpaying for the asset. They risk their leverage profile really kind of getting a little bit dangerous, I would say. I mean, gross debt is going to be well above$100 billion. Leverage could be at four times. They're at 0.6 times right now. So, you know, all of those things start kind of coming into question. But of course, they have a great free cash flow profile.

5:46Kristine Aquino:So deleveraging wouldn't be an issue. That said, there still are, you know, integration and execution risks always with any M &A deal. Yeah.

5:53Paul Sweeney:Well, so if Parma does indeed win the deal, Does that present stronger competition for Netflix, at least in the streaming space?

6:01Kristine Aquino:I mean, it definitely will to some extent. But I think what Netflix and everybody else is banking on is that leverage is just going to be so high for the combined Paramount Warner Brothers discovery that, you know, at least for the first couple of years, I think they're just going to be really focused on kind of driving costs down, hitting their synergy targets, not really being able to invest in the business. but again it's you know it all comes down to exactly what the number is going to be but you're right they definitely will be a stronger competitor although I don't think it's going to be a make or break for Netflix at all.

6:38Drew Reading:Stay with us more from Bloomberg Intelligence coming up after this.

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7:45Paul Sweeney: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. All right, let's move on, though, to John Tucker. One of John Tucker's favorite stocks. And that is Lowe's reporting results. And let's bring you.

8:08Geetha Ranganathan:You know, I'll say the difference between Lowe's and Home Depot, I find more women at Lowe's than Home Depot. Nice to know.

8:15Paul Sweeney:Yeah. I wasn't saying that.

8:17Geetha Ranganathan:I'm just like saying, just my observation.

8:20Paul Sweeney:Okay. Why is that, I wonder? It's more like non-professional friendly, I guess. More DIY.

8:27Drew Reading:Apparently, Paul's going there to pick people up.

8:29Paul Sweeney:Can I just say that the demographic of women might not be interested in you, Paul.

8:34Drew Reading:Okay. Yeah. No surprise. And John Tucker, speaking of do-it-yourself, he just fixed our microphone here in our studio, folks. We had a professional come in here. John's like, no, I got it. That's okay. We do it all here. Don't worry, Anthony. We got it.

8:48Paul Sweeney:Very much a product of Lowe's DIY. But all right, Lowe's, let's get to Lowe's. What is the preview there? And with that, let's bring in Drew Redding, who is the Bloomberg Intelligence U.S. home building analyst. Drew, what is going to be the takeaway? way.

9:02Geetha Ranganathan:So Lowe's reported earlier this morning and overall it was a solid quarter. They had a nice beat on same store sales really due to the strength of their professional customers and their e-commerce channel. They had about a 50 basis point lift from recent storms. You see the stock is down about four to five percent. There's a couple of things going on there. They guided the same store sales for 2026 being about flat to up two percent. While that's exactly in line with what we heard from Home Depot, consensus was on the higher end of that. We think there could be a little bit of conservatism in there, which rightfully so, given where we are with housing.

9:41Geetha Ranganathan:Also, there's a modest earnings reset for the company. The mid-import of their guidance was about 4 % below the street. And really, that's a reflection of weaker than expected operating margins. And that's largely due to some of the acquisitions they've made over the last couple of years. So there's a little bit of company-specific noise in there. The other thing that's going on with the stock, and really, if you look across the housing space as a whole, whether you're talking about the builders, the building product manufacturers, developers, really anyone, they're all read across the board. And I think that has to do with the lack of dialogue around housing policy during the State of the Union address last night.

10:20Geetha Ranganathan:You know, we heard a victory lap on mortgage rates, which has certainly come down. But it was really just a reiteration of the administration's plan to ban institutional purchases. So I think a lot of investors across the housing landscape, including home improvement retailer, were hoping for some policy that could really stoke the housing market.

10:40Drew Reading:So I'm looking at the Mortgage Bankers Association 30-year fixed mortgage, 6.09%. That's as low as it's been in a long time. Is it low enough to get folks out of their homes, you know, and free up the existing home buyer market?

10:58Geetha Ranganathan:Yeah, you're right. We're about 100 basis points below where we were just a year ago. And certainly every, you know, every tick lower in mortgage rates is going to help bring that incremental buyer off the fence. Typically, what we hear is that something in that five and a half percent range is kind of that magic number. Now, that being said, as we've said for a long time, it's not just about mortgage rates. They've certainly helped affordability. They've brought monthly payments down. But home prices continue to rise, they're up more than 50 % since 2019. So when you look at a more holistic view of housing affordability, it's still really constrained.

11:34Geetha Ranganathan:The other thing that we continue to hear, whether it's from the retailers or from the builders, is that buyers are increasingly concerned about the economy. They're increasingly concerned about the outlook for the labor market. So there's a lack of urgency out there. You know, you also have a lot of people maybe sitting on the fence because, you know, they're saying to themselves, look, maybe home prices are going to come down. Maybe rates are going to come down further. Maybe I should wait before making such a big purchasing decision.

12:00Paul Sweeney:Yeah, well, so if that sort of turnover and new housing buyers, that's still going to be stalled given the uncertainty in the macro environment. with something like repair and remodel spending, that segment of those customers, is that something that's going to be enough to carry them through? And I suppose for the rest of the house building sector.

12:22Geetha Ranganathan:Yes, for the home improvement retailers specifically, I think demand has been pretty stable, if not modestly improving. If you look at comp store sales on a two-year basis, there was a little bit of an uptick this quarter. So I think their customer has been pretty resilient. When you think about what's holding back more robust growth in the sector, it's really that big ticket discretionary spending. These are categories like large scale kitchen and bath remodels, maybe a big flooring project, replacing all the doors and windows in your house. And these are things that typically tend to be financed.

12:55Geetha Ranganathan:So with rates at an elevated level, you've seen a pullback in that. And it also goes back to what we said on confidence. You know, with less confidence in the home, the direction of home prices, you have people who are maybe waiting to take on those bigger ticket projects. Stay with us.

13:11Drew Reading:More from Bloomberg Intelligence coming up after this.

13:15Paul Sweeney:Hello, I'm Michelle Hussain. And for more than 20 years, I was at the BBC. Military withdrawal from Afghanistan. But all the time I was delivering the headlines, I wanted to go further than the news of the day. To spend more time with the people shaping our world. And that's what I'm doing here on this podcast. Speaking to people from Nigel Farage. This is love you trying ever so hard. Russia needs to be taught a lesson. This is love you trying ever so hard. To tech journalist Kara Swisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run up in their stock prices.

13:50Paul Sweeney:This will be a place where every weekend you can count on one essential conversation to help make sense of the world. So please join me, listen and subscribe to The Michelle Hussain Show from Bloomberg Weekend, wherever you get your podcasts.

14:08Geetha Ranganathan:You certainly ask interesting questions.