Warner Bros. Urges Investors to Reject Paramount 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. Paramount updating its bid for Warner Brothers, but it did not increase its price. Yeah. It's sticking to that$30 a share offer for Warner Brothers. But what they did do is offer some more commitment on financing. $41 billion new equity backstop. Geetha Ranganathan is Bloomberg Intelligence Analyst on U.S. Media, and she's here with us now.

1:45Now, does this move the needle at all here, Geeta, for Paramount to basically talk about the financing and how it's going to backstop it by the Ellison family, but not change the actual price? Yeah, not not completely sure, Scarlett. I do think that they need to up the price. You know, Warner Brothers Discovery, of course, the main concern that they raised was financing, but they also called the proposal inadequate. inadequate, inferior to Netflix and illusory. The inadequate really stems from the fact that they feel that Paramount Skydance is undervaluing their TV network business pretty substantially.

2:24Plus, they also talk about the extra almost$2 a share that they would need from Paramount if they were to walk away from a Netflix. This is to cover both the termination fee that Warner Brothers Discovery would owe Netflix, as well as some of the financing costs. So there's all of that. You know, you kind of put all of that math together and we come up with at least a$32.50 increased bid that Paramount would need to present in order to kind of get the Warner Brothers Discovery Board back to the table. So, yes, the financing helps a little bit, but not sure it really changes the conversation. We haven't heard a whole lot from Netflix recently.

3:03Are they just quietly sitting on the sidelines and confident in their bid? So they did put out a letter to employees, shareholders, just kind of reiterating their commitment to the deal. They think that it will go through. They don't think they will have huge problems with the regulators. And it was interesting today, even in the Warner Brothers Discovery letter that they put out, suggesting that they don't see, or rather that they view both of the deals as equal from a regulatory perspective. And one of the key numbers that they highlighted, the Warner Brothers Discovery team was the$9 billion in synergies.

3:42So Paramount Skydance basically talking about$3 billion in synergies from its Skydance deals,$6 billion from the Warner Brothers Discovery deal, saying that that's bad for Hollywood. It would result in a lot of job losses, whereas the Netflix deal might actually be better. So who knows? Who knows? And I mean, this is something that's going to play out over the next year and a half to two years. Geetha, we know that Jared Kushner, the president's son-in-law, his private equity firm Affinity Partners was involved in the Paramount Skydance deal. It was supposed to contribute$200 million to the financing, but it has since pulled out of this bid, perhaps because of potential conflicts of interest.

4:22Does this change the scope of Paramount Skydance's offer? Does it make it more attractive, less attractive, or does it not really do much? I think, yes, you're right, Scarlett. The optics were definitely bad and it kind of, looked a little bit questionable. So now they're kind of removing that, which is definitely good. I think it's more positive for the Paramount Skydance deal. That said, though, I think they really, really need to deliver a knockout bid. And the knockout bid that we're kind of looking for is something like$35. I think that really then gets Netflix thinking about, okay, do we need to re-up our offer?

4:55And everybody gets excited at the Warner Brothers Discovery Board again. until they do something really significant on the pricing front. I don't think the Warner Brothers Discovery Board is going to want to come back to the table to re-engage. Geetha, one of the comparable deals out there for a spinoff of Warner Brothers Cable Networks is what Comcast is spinning out its cable networks into a company called Versant. Is that publicly traded yet? Have they done that spin out? Yeah, they did. You know, they have a when issued trading. the actual, the complete distribution will happen sometime in January when it will start trading.

5:30But we do, you know, with the WEN issue trading, we do have some price discovery for that stock. So right now, if you kind of look at where Versant is trading, we get a forward EBITDA multiple of about 5.2 times, which is higher than what Paramount Skydance had suggested for the valuation of the Warner Brothers Discovery at 4.5x. So already there, we're kind of seeing some signs that that the valuation of the global networks business should be slightly higher. Do you see any other M &A taking place in media? I know we're all fixated on the bidding war for Warner Brothers Discovery, but at one point, Comcast was a potential bidder, and it dropped out fairly early.

6:09But are there any other deals kind of percolating in the background that you would keep your eye on? I think there's just a lot of consolidation that's waiting to happen, Scarlett. I think people first want to wait and watch a little bit, see what happens with the Warner Brothers discovery situation, kind of test out what's happening with the regulators. But yeah, they're absolutely a lot of smaller players. And, you know, Netflix becoming bigger or Paramount becoming bigger really kind of forces everybody to take a hard look at their portfolios and see what they should do next. As you rightly mentioned, NBC is the one name that definitely comes up to mind, Comcast NBC.

6:45They need something. their Peacock platform is really subscale. So it's really going to depend on whether they want to do some kind of partnership or they actually need to go out and acquire some other smaller networks, maybe AMC networks, maybe some other kind of, you know, streaming business. So a lot of deals waiting to happen. But I think this is really the big one that everybody's focused on at the moment. Stay with us. More from Bloomberg Intelligence coming up after this. 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.

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8:04You certainly ask interesting questions.

8:10You'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 airline business. Bankrupt Spirit Aviation Holdings, remember them, is in revived discussions to merge with Frontier Group Holdings in a deal that could rescue the deep discount airline from insolvency. Let's break this potential deal down. But George Ferguson, senior aerospace defense and airlines analyst for Bloomberg Intelligence.

8:44George, does it make sense putting these two, I'm going to call them struggling, regional airlines or discount airlines, does it make sense to put them together? You know what? I think it might, actually. So this is, you know, back to the future. Originally, sort of, I think, you know, what we saw sort of set off a little fight for Spirit Airlines was the initial merger or purchase from Frontier, Frontier taking Spirit. JetBlue decided they didn't want to let those two coalesce, merge together and become a major competitor to them. So they stepped in the middle, tried to grab Spirit. And after that, everyone, Spirit, Frontier, JetBlue just went through some pretty rough times as fares weakened in the market.

9:34I think, you know, the economy flyer kind of faded out a little bit on higher inflation and other problems. And so, you know, I think where we're back to, though, is that Spirit and Frontier had very similar business, you know, types, similar cultures. I think if you put the two airlines together now, you'd have an airline that have something like 350 seats. I think there's enough other markets they could go after. I mean, in comparison, you know, Southwest, which is a domestic and sort of near to the U.S. kind of market airline, they have 700 airplanes. They find a place to put all those airplanes.

10:17So I think it could sort of charge growth up pretty quickly for Frontier, sort of help them lay in an extra 100 airplanes. Might not be a bad idea, and they might get a really nice price on it. But do two-week airlines make a strong airline? I mean, look, right now, I think the economy portion of the business is reeling. It has too much capacity. Spirit is shedding. Some of those airplanes are going to go elsewhere. So we're talking about an airline that only has 100. And I think if you want to be competitive in the market, you have to be able to fly sort of coast to coast, offer your customers a full complement of destinations.

10:58I think you need more heft for those loyalty programs that help drive some better results as you sell them credit cards and they buy their groceries and things like that on it. So I don't think it hurts for Frontier to try to get larger and to do it, to supercharge it through taking 100 airplanes out of spirit. I don't think it's a bad idea. Will the regulators allow this, George? I don't think it's going to be a problem. I don't think it was originally a problem when JetBlue was looking at Spirit and when Frontier was looking at Spirit. But now Spirit's even smaller. We kind of put them together today looking at available seat miles in 1Q.

11:42A combined airline looked to us to be the sixth largest in the country. It was just ahead of JetBlue. If it adds, I don't know if it adds some premium seating and knocks some seating out of some of those airplanes, it might not even beat JetBlue. I don't think this is a big issue for the U.S. market. What would this mean for jobs, jobs at Spirit, jobs at Frontier? I mean, I think it could probably preserve some jobs because I don't think they're going to want to shrink the airline operations. But I do think if Spirit doesn't find someone to go with soon, they may cease to exist. And that obviously hurts jobs.

12:21Stay with us. More from Bloomberg Intelligence coming up after this. I'm Carol Masser. And I'm Tim Stenevec, inviting you to join us for the Bloomberg Business Week Daily Podcast. Now, every day, we are bringing you reporting from the magazine that helps global leaders stay ahead. We've got insight on the people, the companies, and trends that are shaping today's complex economy. That's right, Tim. We're all over global business, finance, tech news, all as it is happening in real time. And we've got complete coverage of the U.S. market close. Gotta say, basically, if it impacts financial markets, if it impacts companies, if it's impacting trends and narratives that are out there, we are on it.

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13:25And I'm Tim Stanovic. Subscribe today wherever you get your podcasts.

13:32You'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, Scarleth and Paul Sweeney live here in our Bloomberg Interactive Broker Studio in New York City, streaming live on YouTube as well. Well, homebuilder Lenar reported some earnings today. A little bit disappointing here. The stock down 5 % today, down 18 % year-to-date. This is a big company. It's got a market cap of like$28 billion. But I'm looking at some of the homebuilders.

14:06A lot of them are down double digits on a year-to-date basis here. Let's break it down with Drew Redding, homebuilding analyst for Bloomberg Intelligence. Drew, talk to us about Lennar. What did they say to the street here with their latest earnings? Yeah, this was a tough print for Lennar this quarter. They came into the quarter with a pretty low bar. Investor expectations had been coming down, but they still disappointed on both orders and margins. And even more concerning was the guidance they issued for the first quarter, which was short on orders, closings, and margins. So we think that consensus needs to come down pretty sharply here.

14:44You know, what this tells us is that even though rates have fallen to kind of that low 6 % range, I think we're about 6.3 now, it doesn't appear that they're significantly catalyzing demand, which was what a lot of people had been expecting. So I think that points out that, you know, there's other things going on. It's, you know, we've said in the past, it's not just rates, but it's prices and overall affordability. But something we've heard pretty consistently from the builders is that consumer confidence is really holding the market back. There's concerns over the direction of the economy and concerns about the labor market.

15:19And if look, if you don't have a job, you're certainly not buying a house. So we expect in this environment the use of sales incentives to remain elevated. And that's going to continue to pressure margins. Yeah. I mean, they get volume, but they don't get the profitability. So homebuilders are facing a lot of challenges. They also face competition from the resale market. Talk a little bit about the numbers involved here in terms of new construction versus existing homes. Yeah, that's a great point. The lack of for sale inventory in the resale market was a huge benefit to the builders over the last couple of years.

15:55There weren't a lot of options, so it funneled buyers into the new home market where builders have been able to make monthly payments more attractive for their use of buy downs. That dynamic has shifted over the last year where we're starting to see pretty significant increases in for sale listings in the resale market, particularly in the most important markets for the builders. Think Florida, Texas, California. So all of a sudden, there's this new competition for them. And in order to get a sale, they're having to fight harder for each one, which means higher incentives, more pressure on pricing.

16:29Drew, I'm looking at the existing home sales in the United States. It's been running at about a 4 million home rate for the last few years. But historically, that's been a lot higher, hasn't it? So there's just not a lot of supply of existing homes out there in the marketplace. And is that an interest rate story? Yeah, it's partly an interest rate story. You know, one thing that we've consistently pointed out is that if you look at the composition of outstanding mortgages, you have a majority of current mortgage holders who have something well below the prevailing mortgage rate, which is around 6 % now.

17:04A lot of people during the pandemic were able to lock in rates in the fours and even the high threes, some perhaps in the twos. So the existing home market has really been frozen. If you look at total volumes, you mentioned we've been hovering around this 4 million annualized rate for about three years now. That's about 20 % below what a normalized market would look like. So I think rates coming certainly help as we look out to next year. We do think that you're going to see perhaps mid to high single digit growth in the existing home market. But keep in mind, we're coming off, you know, historically low level.

17:41So some improvement, but I think context is certainly key there. Lenar is certainly not the only builder facing these these challenges. How is the company specifically saying or explaining to investors how it's adapting to this new normal of persistent affordability concerns due to softening consumer confidence and a weakening job market? All these macro headwinds that it has no control over. Yeah, Lenar has been a pretty interesting example. Remember, they're the second largest builder by volume in the country, and they run a production first business, which means their goal is to push volumes.

18:20And over the last couple of years, they've been willing to sacrifice margin to get volume. So, you know, they'll tell you they're bringing a more affordable product to the market. But what we've seen is a dramatic drop in their gross margins. In just three years, they've gone from a gross margin in the high 20 % to something in the high teens percent in 2025. So a very sharp ball. And what they told us last quarter is that they can only push so hard on this market. The demand just simply isn't there. So in order to get more sales, the incentives have to keep ratcheting up. So what they told us is that they're making some sort of a pivot into where they're looking to sustain their gross margin.

19:01So what we want to hear from them on the call is, you know, where did we think that gross margin floor ultimately lands? And is the pullback in production that we've started to see, is it has it normalized? 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.

19:43Whether 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. Sometimes 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.

20:21you'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 the biggest ipo of the year price last night medline it's not really sexy it's like a medical device company but it's like a six plus billion dollar IPO. It's just extraordinary. It's got some blue chip private equity folks behind it. I have no idea what this company does, but I know who does. And that's Jonathan Palmer. He's an analyst at Bloomberg Intelligence.

20:55He covers all the healthcare device companies and things like that. And the good thing about Bloomberg Intelligence, we're not an underwriter. We're not a broker dealer. We can write on private companies. We can write research on private companies. We can write research on IPO companies. And that's exactly what Jonathan did. So he's out there with a definitive view on this company for investors. Jonathan, what does Medline do here, and why are they coming public? Thanks, Paul, for having me. So, Medline is what's traditionally thought of as a distributor, but I'd argue it's more than that. So, really, this company's been around for decades.

21:27It started by the Mills family in the 60s. In 2021, they sold to private equity, and now they're coming back to the public markets. What they traditionally did was provide distribution and logistics to hospitals. But over the years, they actually started making their own products. So things like masks, drapes, sutures, all the stuff that kind of you need in a surgery or to take care of patients. It's not too sexy, but has a much better margin than logistics. So half the company today is their own Medline brand products. Half of it is distribution services. The secret sauce here is that they basically give, they don't give it away, but they can essentially give away the distribution and logistics piece while capturing all the margin on the product side.

22:09How much market share do they have? I mean, I've gone to hospitals before and seen the Medline name attached to, I don't know, like a bed, for instance, or, you know, the canister on the wall where you get your own gloves. Yeah, that's a good question. I mean, I think it would depend on the product category. I mean, from the distribution side, they're just a little bit bigger than their peers like Cardinal Health and what was Owens and Minor. It's kind of a oligopoly where those big three players are distributing to all the the healthcare facilities. You know, in terms of products, you know, it's about half of revenue, so roughly$12,$15 billion right here.

22:45What about tariffs? How affected by tariffs are they? Because I can't imagine that these items, gloves, masks, swabs, syringes are made in the U.S. Well, they do have a fair amount of manufacturing in the United States. They have talked about tariffs, a couple hundred million impact this year and next year. I mean, to be honest with you, For a company this size and this scale, that's a pretty surmountable hurdle. It'll get priced in in the next round of contract negotiations, and it'll be business as usual going forward. As a former banker, I just look at the deal dynamics here. Upsized offering.

23:19Offering finished north of 10 times oversubscribed. Top 10 investors in this allocation took more than 50 % of the shares. Top 25 investors took about 80 % of the deal here. Are the private equity guys, are they selling here? or is this just company shares? It's a combination of both. And then the Mills family still owns about 20 % of the company and they're not selling any shares. Good. So what are the use of proceeds here, do you think? I'm sorry, what are the use of proceeds here? What are they going to use the money for? Oh, primarily to pay down debt. They had about$16 billion of debt, you know, that they levered up on the private equity transaction and they're paying down a pretty healthy slug of that right here.