$111 billion results in a "full loss": Paramount(PSKY.US) barely wins, Netflix(NFLX.US) avoids the bullet

The Hollywood century merger battle that attracted global attention has ended, with Paramount’s $111 billion new acquisition plan emerging victorious, but it was a fight where no one truly won.

According to IT House Finance APP, streaming giant Netflix (NFLX.US) refused to increase its bid for Warner Bros. Discovery (WBD.US) on Thursday, allowing this Hollywood conglomerate to go to its competitor bidder, Paramount (PSKY.US). Despite the transaction including extremely strict safeguards, the $111 billion price tag still risks prolonging losses.

Warner Bros. announced that Paramount’s all-cash offer of $31 per share was better than its previous agreement with Netflix at $27.75 per share. That deal left behind declining broadcast networks, which are being divested at questionable value and are heavily in debt.

This battle largely became about planning a clear path to deal, much like it was about money. Paramount’s ability to absorb a much larger studio, its vast film library and intellectual property, along with the accompanying television assets, raised serious doubts, including from Netflix and Warner Bros. board members.

CEO David Ellison ultimately used his billionaire father Larry Ellison to allay concerns, something Netflix failed to do. Before the deal was finalized, the burden fell on Larry Ellison, the founder of Oracle, whose stake in the cloud computing giant now effectively guaranteed the bid.

Nevertheless, even if Paramount realizes its promised $6 billion in substantial synergies, combining and taxing its expected revenue with Warner’s, the return rate would be less than 6%. Cost-cutting measures could still face political opposition, and the merger would attract antitrust criticism, regardless of how close the Ellison family is to President Trump.

Meanwhile, interest costs remain a concern. Considering Warner Bros.'s own sluggish performance after merging with Discovery nearly four years ago under heavy debt, these interest costs look daunting. Over the five years before the deal negotiations surfaced, its stock price had fallen by about half.

One consolation is that Warner Bros. Discovery is finally turning things around. Last year, its crown jewel, HBO, doubled its streaming profits. Even so, Netflix may have dodged a merger bullet; after withdrawing from the bidding, its stock jumped 10%.

Warner Bros.'s deal can only partially offset the losses.

Some scars will remain. This $360 billion company, led by Ted Sarandos and Greg Peters, has already attracted regulatory attention. A group of state attorneys general expressed concerns about the merger plan, and the Department of Justice launched an investigation focusing on Netflix’s potential market power.

Warner CEO David Zaslav at least secured an astonishing nearly 150% premium, along with exceptionally strict terms to compensate any investors who held out until now. Of course, this generously overlooks the costly opportunity cost, as the S&P 500 has risen 80% over the past five years. The casualties of this war will linger long-term.