On Tuesday, not only did Netflix CEO Ted Sarandos need to shore-up his “winning bid” to purchase Warner Bros. Discovery; he also needed to convince his shareholders his months-long quest to nail down the deal is worth it after losing what is approaching a whopping $170 billion in his stock’s market value amid the drama, On The Money has learned.
At least part of Tuesday’s earnings announcement, in which the company beat expectations, was designed to remind shareholders that the streaming giant is still a giant even if it’s blowing around $83 billion – now all in cash – to buy the two biggest pieces of WBD, its Warner Studios and its HBO Max streaming service.
Sarandos took a major step in accomplishing his first task: He and WBD announced that the streaming giant had made its $83 billion bid for the company’s streaming service all cash, keeping it in the lead position to win the bidding war for WBD against rival Paramount Skydance, a.k.a. PSKY.
The jury, as they say, is still out on task No. 2. Not only did Netflix shares actually plunge after the better-than-expected earnings report came out. Netflix also has to erase the tens of billions of dollars in market losses that occurred during the long bidding war in which investors dumped the stock. They believed — and many still do — Netflix was overpaying for an asset it really doesn’t need since its tremendous growth has taken place not through large acquisitions, but organically.
There’s a good chance Netflix stock isn’t done sliding. Its all-cash bid — as opposed to its $27.75-a-share cash-stock offering — was warmly welcomed by WBD, its board and CEO David Zaslav, a media veteran who has a knack for squeezing increasingly better offers for his shareholders.
But the Netflix sweetener also underscores the costly nature of what it’s trying to accomplish. What is good for WBD and its shareholders (one of whom, Mario Gabelli, had been pressing Netflix to “simplify” its bid by making it all cash) may not be so good for the Netflix shareholder base as the company tries to pay down the costs associated with one of the biggest media buys in recent memory.
The cash-stock bid (an 85%-15% split) already included $60 billion in debt, issuing $50 billion new bonds and loans and assuming $10 billion from WBD. The new offering, if I’m reading it right, means more debt as part of the deal to come up with the additional cash.
And there may be even more debt to come.
Key to making the Netflix bid work is the sale of WBD’s cable properties for at least $3 a share. The spinoff will include around $20 billion in debt from WBD. Netflix says it can take it down a bit with improved cash flow from the parts of WBD it’s buying, but that will barely make a dent in the leverage of the cable spinoff.
You can see a scenario where Netflix needs to fiddle with its deal once again, taking billions of more debt from the spinoff to get to that magical $3-a-share bogey and convince shareholders it really does have a superior offer compared to PSKY’s $30-a-share all-cash bid.
Meanwhile, it’s unclear how PSKY – run by indie movie producer David Ellison, his dad, the mega billionaire Oracle co-founder Larry Ellison, and partners at Gerry Cardinale’s RedBird Capital – will respond to Netflix’s latest move.
Zaslav has made no secret of his love of the Netflix deal and his admiration of Sarandos – so much so that the Paramount peeps believe he played dirty pool over what they say is their better deal for the entire company.
Zas, as he’s known in the biz, counters that pushing Netflix over the top is money from the planned sale of WBD’s cable properties — CNN, TNT, Discovery — for as much as $3 or more a share. PSKY doubts the valuation and has sued WBD to show that Zas skewed the deal process to favor his buddy running Netflix.
In yet another twist, Zas is both signaling that WBD will open the bidding process if Paramount increases its offer about $3 a share while turning the screws on Paramount to pay up. Also on Tuesday, he announced that he is expediting the shareholder vote on the Netflix offer to sometime in late February or early March as opposed to its original time table in the spring.
“This puts pressure on them (PSKY) to stop screwing around with lawsuits and either pay more or go away,” a WBD insider told On The Money.
Reps for Netflix and PSKY had no immediate comment.
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