In what will likely go down as one of the more drama-filled acquisition sagas in recent years, it finally looks as if Paramount Skydance (PSKY 0.45%) has emerged as the winner in the battle over who would acquire Warner Bros. (WBD 0.52%).
In a statement, Netflix (NFLX 0.01%) announced that Warner Bros.' board of directors informed the firm that Paramount's recently enhanced offer is a "superior proposal." Netflix also stated it would not match Paramount's bid, paving the way for Paramount to acquire Warner Bros., though the deal will still require regulatory approval.
Given that Netflix will not be able to acquire certain assets from Warner Bros., an effort the company spent months trying to get done, where does that leave Netflix? Is the stock a buy?
Image source: Netflix.
How we got here
In December, Netflix announced an agreement with Warner Bros. to acquire the company's film and television studios, including HBO, for an equity value of $27.75 per share, and an enterprise value of nearly $83 billion, which assumed nearly $11 billion of Warner Bros.' debt. Warner Bros.' cable assets, including top networks like CNN, would be spun off into a separate company. Netflix's proposal had initially been part cash and part stock, but the streaming giant eventually made the deal all cash to make it more attractive.
However, Paramount also wanted to acquire Warner Bros. Following the announced agreement between Warner Bros. and Netflix, Paramount immediately announced a hostile all-cash bid of $30 per share, or about $78 billion, for the entire company, including the cable assets.
Paramount's CEO, David Ellison, is the son of Oracle founder Larry Ellison, who committed to being personally responsible for more than $40 billion of equity financing behind Paramount's offer, as well as damage claims.
NASDAQ: NFLX
Key Data Points
Initially and for most of the ongoing negotiations, Warner Bros.' board informed Paramount that Netflix had the more compelling offer. But it became clear that Paramount would not back down. The company sweetened its deal by offering to pay the $2.8 billion breakup fee that Warner Bros. would owe Netflix if it walked away.
It also agreed to pay shareholders a ticking fee of $0.25 per share ($650 million) per quarter for every quarter the deal did not close past a certain date. This signaled confidence in Paramount's ability to obtain regulatory approval. Finally, Paramount increased its offer to $31 per share and also offered Warner Bros. a $7 billion breakup fee if regulators didn't approve the deal.
Is Netflix stock a buy?
Despite walking away from the deal, I feel as if Netflix came out of this whole ordeal unscathed and had merit in pursuing such an acquisition. For one, Netflix has sold off sharply since it announced the deal, and after it announced it would walk away, the stock popped.
Investors were clearly unhappy with this acquisition because Netflix would have to take on a tremendous amount of debt to fund the expensive deal. Furthermore, Netflix's organic growth strategy had been working, and the company is not a proven acquirer. So the fact that Netflix is no longer pursuing the deal is a near-term win for shareholders, and Netflix will also get the $2.8 billion breakup fee.
For what it's worth, I actually felt the acquisition made sense for Netflix and could have greatly enhanced the company, given all the great content Netflix would have acquired from Warner Bros. HBO owns some of the strongest properties in the world, including Game of Thrones, Harry Potter, and DC Studios, not to mention older, historic shows like The Sopranos that people watch repeatedly.
These are really unique franchises that are hard to replicate in their ability to attract long-term, loyal viewers. Netflix has a great technology stack and marketing machine, so I felt like pairing HBO's content with those attributes could have been a force to be reckoned with. I also didn't feel as if regulatory approval was out of the question.
Ultimately, I still view Netflix as a buy because, as I mentioned above, the company has been thriving, growing its subscriber base substantially, and has reached 325 million paying subscribers globally.
Meanwhile, Natflix has successfully raised subscription prices and has a significant growth runway in its new, expanding ad revenue stream. While the acquisition of Warner Bros. film and television studios and HBO could have been a tremendous long-term opportunity, I certainly think Netflix will be OK and that the stock could return to the highs it saw last year.
