After months of fierce gamesmanship, a winner has emerged in the saga of buying Warner Bros. Discovery. On Feb. 26, Netflix, the world’s largest streaming company, dropped out of the competition, putting the legacy media giant on track to merge with Paramount Skydance, controlled by David Ellison, the world’s sixth-richest man, and his father Larry. However, now comes the hard part.
Warner Bros. Discovery-Paramount merger to create 210 million-subscriber media giant after Netflix exits
If the deal is completed, it would create a giant conglomerate that would include streaming networks HBO Max and Paramount+, news channels CBS and CNN, and the rights to film franchises from “Harry Potter” to “Transformers.” What would have been a good addition for Netflix — which has coveted Warner’s catalog and the ability to churn out Oscar-nominated content — would have existed for Paramount, says Robert Fishman of MoffettNathanson, a firm of analysts. On its own, Paramount lacks the scale to survive the streaming wars; This is a much better opportunity with Warner. The combined company will have about 210 million streaming subscribers — still far less than Netflix, which claims about 325 million, but more than other competitors like Disney.
Still, it’s a bold gamble by the Ellisons and their investment partners. They are spending about $111 billion to buy Warner, which also includes its debt and a $2.8 billion fee paid to Netflix, with whom a deal was previously agreed. It will be financed in part by borrowing $58 billion. Adding the debt already on Paramount’s balance sheet, the total amounts to more than $70 billion. Last year the two companies earned a combined operating profit (before depreciation and amortization) of just $11 billion.
That amount of leverage was partly why Warner was initially reluctant to accept Ellison’s advances. Raising the price and offering various guarantees helped secure a deal. Paramount’s promise to release at least 30 films per year in theaters also fell through, as tinsel town feared the destruction of traditional cinema under the leadership of Netflix. Nor was there any indication from Washington that Paramount’s acquisition, unlike Netflix, would be done with little objection from trustbusters, perhaps thanks to Ellison’s friendship with Donald Trump. The president recently refused to meet with Netflix co-chief Ted Sarandos during a visit to the White House, sent an aide in his place, and asked the streaming giant to fire board member Susan Rice, who served in the Biden administration.
A deal now appears likely to close, although it is not certain. Warner shareholders must approve the acquisition at a meeting in April. Attorneys-general in California and other states could fight back if they feel federal regulators have failed to do their jobs. Antitrust police in Europe and elsewhere would also have to clear the case.
If Ellison prevails, the real work will begin. Paramount Skydance’s Warner Bros. Discovery would be indebted and burdened. The Ellisons already predict a $6 billion “cost-synergy opportunity” that Hollywood is at risk of losing jobs to. There may also be a need to sell assets. Bernstein broker Laurent Yoon believes the deal gives the combined company “a chance for greatness.” But history shows that media mergers often end badly – especially those involving the studio behind Looney Tunes. There may yet be another installment of this franchise.
