BREAKINGVIEWS-Netflix solves just one of HBO bid’s many problems

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Jennifer Saba

NEW YORK, Jan 20 (Reuters Breakingviews) - Netflix NFLX.O has given one answer to M&A complaints. It faces more than one problem, though. The streaming giant has switched its $83 billion offer for most of media conglomerate Warner Bros Discovery WBD.O to be entirely in cash. It addresses concerns over the rapid drop in Netflix’s share price. It does nothing to solve regulatory snares, investor unease, and a highly motivated rival in Paramount Skydance PSKY.O.

The company co-led by Ted Sarandos rejigged its $27.75 per share offer for the best parts of WBD on Tuesday. The original agreement, announced on December 5, comprised a mix of cash and stock, worth $23.25 and $4.50, respectively. A so-called collar guaranteed that the Netflix equity on offer would be adjusted to hold its value constant within a certain band. Yet by December 8, the bidder’s shares had crashed below the bottom end of that range. On the same day, Paramount went directly to shareholders with an all-cash offer for the entire company of $30 per share.

Switching to all-cash steadies Netflix’s position. Yet as the company prepares to report results later on Tuesday, it isn’t endearing itself with its own investors. Its market value has dropped 28% since the start of September.

WBD’s shareholders might reasonably feel their own angst. The Netflix deal is contingent on spinning off the seller’s traditional TV networks. How much that stub is worth determines which offer is superior. In a regulatory filing, WBD gave an inkling of what it reckons, but within a huge range running from as low as 42 cents – a figure it brushes aside as irrelevant – to $6.86 per share in the event of a sale.

Unfortunately for WBD boss David Zaslav, who backs Netflix’s bid, there’s an apt yardstick. Rival Comcast CMCSA.O recently hived its own networks off into Versant Media VSNT.O, which trades at a valuation of about 3.6 times the EBITDA it forecasts for 2026. On the same multiple, the $5.4 billion of EBITDA predicted for WBD’s networks implies an enterprise value of $19.7 billion. Back out the $17 billion in net debt targeted for the spin, and Discovery Global would trade at a bit over $1 per share.

There are more generous possible comparisons. Fox FOXA.O, for instance, trades at 9 times EBITDA, according to Visible Alpha data. But Rupert Murdoch’s company has little debt, National Football League games and one of the country’s highest-rated cable networks.

Furthermore, regulators in Washington and Brussels may prove meddlesome, since Netflix dominates streaming worldwide. Paramount owner David Ellison could yet further boost his case by increasing his offer. Whatever the case, Netflix is no longer in charge of the M&A show.

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CONTEXT NEWS

Netflix submitted an amended all-cash offer for Warner Bros Discovery’s movie studio and HBO channel on January 20. Under the new terms, the streaming giant will offer $27.75 per share in cash. It had previously, on December 5, agreed to pay $23.25 in cash and $4.50 in Netflix stock.

Paramount on December 8 initiated a $30-a-share all-cash tender offer to buy the entirety of rival WBD.

(Editing by Jonathan Guilford; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on SABA/jennifer.saba@thomsonreuters.com))