The $100bn Hostile Takeover: Netflix vs. Paramount

Welcome back to the Market Maker podcast, and we've got a bit of a breaking episode. And whenever there's a breaking one, I think I've only had maybe one or two throughout the year because it kind of breaks our format on the show. And I thought when you've got a situation like this, you've got a streaming wars finale with Netflix versus Paramount. Who you gonna call? You're gonna call Stephen Barnett.

Stephen Barnett. Or Ghostbusters. One of the two.

Stephen Barnett is back, folks, by popular demand and managed to twist his arm this morning. Not just one, but two episodes. He's going to do a little bit of a mini deep dive. Just as I said, I've had so many questions and I've just seen the media go absolutely parabolic on this story. It's insane. I mean, it's such a, it's such an interesting one. You just couldn't write this sort of story at the end of the year. So Steven, great to have you back. And yeah, how have you been first?

Yeah, thank you so much, Anthony. It's really good to be here. I reckon it was probably 5 or 6 months since I last did a Deal Room podcast, and here I am on the Market Maker podcast. But you know, it's all much of a muchness. And yeah, I'm very well. I was just looking, if you are watching this on YouTube and you haven't seen my face in about 5 or 6 months, I've got quite a lot more wrinkles, which is horrible. I don't tend to look at my face that much these days. And, you know, when you've got a 4-month-old child and you don't get a lot of sleep, that's what happens. You start looking really old all of a sudden. It's quite depressing. So what I'm going to do is I'm going to turn my screen off and just focus on you, Anthony.

No, come on. Just because you're a dad now and you've got big hair and wrinkles. Big hair and wrinkles.

Oh dear.

Yeah, look, let's dive into this one though, because I mean, this is, I mean, people have been putting this, I've read a few headlines and I've caught a few here from the press. They've been saying you're witnessing the battle, the final battle for the soul of Hollywood. I mean, this is the absolute beauty, the sensational nature of the press, of course, but they're talking about fighting for the keys of the Warner Brothers kingdom is how the media are coining this. So what? We've talked about this in a recent episode about the journey up to this, because Paramount have been kind of cranking it up bit by bit. And then there was this massive surprise when Netflix stepped in. So, so where are we at at the moment? What's the narrative here?

Yeah, so I was just having a little bit of research on this this morning, and obviously, much like everyone else, I've ingested quite a lot of headlines and tried to do, tried to get myself up to speed with this story. So I thought I'd present this little kind of breaking episode a bit like a movie script, because why not? True to form. So we're going to start with a backstory, then we're going to go through a cast of characters, discuss the plot, maybe there might be a twist at the end, and then maybe the conclusion just to finish it off. So the backstory, and you might have discussed this on one of your podcasts previously, but Warner Bros. Discovery has been a really, really badly performing company over the last few years. It was an ill-fated merger between basically a bit of a dog, which is Discovery, owns a lot of cable assets, slightly declining, not particularly sexy, lots of not very high quality intellectual property, shall we say. That was actually the CEO David Zaslav's kind of home space. They acquired or merged with Warner Brothers. And Warner Brothers is obviously the storied name in Hollywood. It has got such amazing intellectual property. And obviously as a Harry Potter fan, like everyone in the world is, that's the one that you think of. Absolutely fantastic intellectual property. And it's also got HBO Max, which is the third largest streaming platform in the US behind Amazon Prime and Netflix. So there was this kind of ugly combination of the two, and I was just looking at Warner Brothers' share price. And over the last 6 months, can you guess the share price change for Warner Brothers over the last 6 months?

In the last 6 months? I was just trying to think when did Paramount first start to come in?

September.

In September. Okay. So I'd imagine it's like, it looks a little bit like the Nike swoosh, probably. They're probably declining and then they've gone into being a prized target and it's just ramped like crazy.

Yeah. I mean, if you look at the market cap, if you look at the share price increase in the last 6, 7 months, it's up about 160% to stock, right? But if you look at the share price over the last 5 years, down 2%. So it has been a really struggling declining asset, very heavily indebted with this weight of Discovery sitting alongside a very, very good intellectual property heavy asset. And what Zaslav said in, I think June of this year was he said, look, this strategy isn't working, right? We are going to split the two up. We're going to hive off Discovery and the cable, the declining assets, and then we're going to just have HBO Max and Warner Brothers Studios in this really, really nice company. And that's when the share price started to tick up because people saw the rationale for that. So that was in June of this year. Share price starts to tick up. Then in September, you get the first advance from Paramount and Skydance Studios backed by David Ellison and by association, Larry Ellison. And we'll continue to go through, maybe should we go through a bit of cast of characters to get to today? Because there's some Hollywood-style characters in the mix here.

Yeah, you've mentioned a couple of names there. So, perhaps just exploring some of those potential names first would be a good thing, just so everyone's up to speed.

Yeah, so I'm going to talk about 3 characters here. We've got the CEO of Warner Bros. Discovery, Zaslav. He's got such an interesting background. Then I want to talk about David Ellison, the son of Larry Ellison. And then I want to talk about the co-CEO of Netflix, Ted Sarandos. And I just want you to picture this in the context of me trying to pitch a Hollywood blockbuster to you because they're three very different characters. So Zaslav, he is a New Yorker, right? He is not Hollywood institution. He is an upstart, right? He was CEO of Discovery, fat paychecks, very much from the kind of private equity mold of asset stripping and cutting costs. So when the merger happened and he got the keys to Warner Brothers, he becomes a little bit of a Hollywood anti-hero. He interestingly enough, this is such a fantastic little segue. He, when he moved to Hollywood in 2021, he bought the house of the ex-vice president and head of content at Paramount. So it was 1033 Woodlands. It was a guy called Robert Evans, who was an interesting character in and of himself. So he passed away. Zaslav comes in, the new New Yorker kid on the block with shiny white teeth. And starts making moves, right? Fires a load of people, a load of employees, you know, causes a bit of a stir, trade union issues, all sorts of things. So you've got this Zaslav character who's the holder of the keys to this asset that's being fought over. Then on the left-hand side, you've got David Ellison. And David Ellison is the son of the world's third richest man, sometimes first richest man, depending on the share price of Oracle. And he, as the ultimate nepo baby, got given a film studio and actually had a great, a decent amount of success. Commission, you know, responsible for Mission: Impossible, Terminator, the new Top Gun. Skydance, which was his studio, merged with Paramount. And the market capitalization of these two studios is about $15, $16 billion. So not a small company, but not a big beast. And David Ellison kind of rolls around. I was reading a GQ profile of him that says, it starts by saying, have you ever been dropped off at your hotel in a Ferrari? The kind that takes corners so sharply that when the driver is informed he just passed your turn, that it's no big deal. He can just take the next term and loop around. He talks about Hawaiian Island, the 8th biggest yacht in the world. So this kind of thing, right? So that's David Ellison. Then you've got Ted Sarandos, who's the co-CEO of Netflix. He's like the nice guy. So he was like, he was part of the original Netflix team. He worked out of his home for 3 years as Netflix was a scrappy startup and basically became head of content. He was the one that was responsible for commissioning things like Stranger Things, taking punts on interesting content. People like him, content creators like him, and he's generally considered to be a pretty steady, sober character. So these are the three characters, the Netflix CEO, you've got David Ellison, and then you've got Zaslav in the middle trying to figure out where to sell this company.

God, you said it at the beginning, you literally couldn't make this stuff up given how you set the scene there. So we understand the characters then. So what's the plot? You kind of slowly went into it a little bit there in terms of the narrative of the journey that Discovery had been through with Time Warner. But what's happening now and what is the objectives then that some of these people are in this conversation are looking to get out of this? And more so, what's the ramification of the outcomes if it goes one way or the other?

Yeah, it's an absolutely crazy story and one that has fantastic scenes if you were to write a movie about it. So in September, David Ellison, Skydance, Paramount, backed by the money of his dad, plus some other investors that we'll talk about in a second, presents a first offer to And this is not a hostile offer. This is a friendly offer. You know, we want to buy your company. This is the package that we've put together. This is how much we are going to offer. I think it was $19.50 a share at the time. This was back in September. We really, really want to work with you guys, right? Bearing in mind that Paramount and Skydance back then was a $12 billion market capitalization company, and we now, we know that Warner Bros. Discovery is a $70 billion. So this is like the mouse eating the elephant, right? You know, really big reverse takeover. So David Ellison's advances get slightly rebuffed. There's back and forth. There's a couple of other bids that are put in. David Ellison actually goes to delivers the first bid in person to Zaslav in his house, which is the house of the ex-Paramount guy, as I mentioned. Wonderful scene. If you're going to snapshot that.

Just to be clear though, so that's completely not usual.

Completely not usual. Usually this has got the kind of interface of investment banks and stuffy boardrooms and things like this. So Ellison was trying to make the kind of personal play, right? You know, I'm a good guy, you're a good guy, let's get this thing done. Maybe playing to a bit of ego, all of this stuff, right? And this is when Zaslav realizes, hey, I've got to put this up to an auction. I've got to go out and see who else could be interested. So Comcast, which is another US cable provider, they were interested, you know, was Amazon going to come in? Maybe, maybe not. Was Netflix going to come in? Netflix have never done an acquisition. I think their biggest ever acquisition is like $900 million. Yeah.

No, I saw it. $680 million. I think it was just that max one they've ever done.

So this is unprecedented. It's so unprecedented. And like the back channels and some of the rumors and the rumblings is like, does Netflix really even want this?

Right?

Share price has been down every time the rumors have happened about this because Netflix is doing fine with the organic growth and organic content strategy. It's already the 800-pound gorilla in this environment. Does it need Warner Brothers Discovery?

Yeah, I thought actually until I saw the breakup fee come out, I actually thought Netflix were just trying to juice them for an extra 5, 10 more billion just to kind of block, you know, make them pay a richer price. But there, that breakup fee as I'm sure we'll get to, would suggest otherwise.

Yeah, absolutely. So, so this thing, this thing started to accelerate over the course of the last couple of weeks. This is early December of 2025. Paramount again are very, very much at the table, but Netflix is the board's preferred bidder. And last Thursday, which I believe was the 4th of December, last Thursday is where it all kicked off, right? So Netflix submitted its $83 billion bid, combination of cash and shares. I think it was $83 billion. You can correct me if I'm wrong. And at the same time as the board were voting to approve Netflix's offer to buy, and I should note to buy the studio Warner Brothers and HBO, they will carve off and sell Discovery and the cable assets. Netflix doesn't want anything to do with them. Paramount were like knocking on the door, were trying to get an improved offer across, and they got ghosted that whole, the whole of Thursday. And this is all in text messages that are publicly available to see what happened. Almost a kind of begging David Ellison and, you know, his acolytes saying, look, you know, we can offer you much more. Our package is much more compelling. We've got the financing in place. Please just speak to us. But the Warner Brothers board are having none of it. They were really, really focusing on like certainty of funds, you know, Netflix share price and Netflix shares plus cash. They've got the firepower to do it. Speed of completion. I don't know if you, are you a Netflix subscriber, Ant? Yeah. Yeah. Did you get the email on Friday saying the deal's done?

I was like, oh, they've shot their load here a little early.

So that's a little bit preemptive. So yeah, certainty of, and they, I mean, we'll talk about antitrust issues in a moment, but anyway, so the board were much more kind of favorable to the Netflix deal and obviously approved that. So fast forward to this week and Paramount, obviously they're not going to get, they're like a dog with a bone, right? I can't imagine David and Larry Ellison are used to not getting what they want. Something strikes me that they tend to get what they want. So they go hostile and they take an improved offer, which is not necessarily their best and final. They were very explicit in mentioning this, an improved offer, not now to the board because the board don't want to hear about it. They've accepted Netflix, but to the shareholders in a hostile takeover situation. So it is all live and it is all extremely exciting.

I'll just I just want to put into context then. So I think it's MOLUS who are with Netflix as the advisor. What would the environment be in somewhere like MOLUS as an investment banker during this period?

It's so interesting because, so I think it, yeah, so it's MOLUS for Netflix, maybe Rain Bank for one of the other two, and I can't remember the third.

I think Bank of America and Citi are involved as well. Yeah.

So these guys are effectively getting bypassed and in the world of tech and well, in the world of M&A, the senior rainmakers all know each other. So they've got lines of communication open, you know, so the guys advising Paramount are very, very senior bankers and the guys that are advising Warner Brothers are very, very senior bankers. But the conversation has kind of gone over and above their heads. To David Ellison driving over in his car and meeting Zaslav and all this cast of characters. And it feels like the investment bankers have slightly lost a grip on this and they're going like, how the hell do we deal with it? My expectation of Moelis' advice for Netflix would be just, let's just wait this out, right? You've got the approved offer. Did you even really want this asset that much? And just hold tight, be the kind of adult in the room and see where this thing plays out.

But what I mean, the size of that breakup fee though, I mean, when you say some of those things, I mean, there is, what is it? It's a $5.8 billion payable termination fee by Netflix.

So this is if Netflix, if the regulators of Netflix killed the deal, right? Right. So if Warner Brothers Dumps Netflix, they owe Netflix $2.8 billion.

Okay.

And that, by the way, factors into the premium that Paramount is offering, right? You have to kind of put that into the, you know, $100+ billion offer that they've made. But then if the regulators, which they might well do, kill the Netflix deal, Netflix owes $5.8 billion, which is an enormous amount of money. It's about 6% of the overall deal size. But again, if I was Warner Brothers, that would be a core part of the negotiation because we know that this thing is going to get very hotly contested.

So before we get to perhaps the most key character of all of this, which is of course one of the main men of the year in our dear Donald. and the regulators. Just a couple of points here, um, that I had in, in notes was, um, one on why, why cinema hates this. I mean, it's kind of like this, this, um, Netflix viewing theaters as, as marketing tools, not, not profit centers. Um, and then there's this, uh, so two things. One, the black box fear. Uh, this is something I just wanted to touch on, which is the kind of advertising component of this. There's some really good kind of advertising industry press out there, and they were kind of latching onto some different things. And it's advertisers worrying that Netflix will kill the flexibility of the HBOs' ad sales and force everyone into their rigid high-tech and importantly, what's quite opaque system. I don't know if this is a common word that's used, um, that you use in your M&A experience, but walled garden, that idea that with Netflix, they offer scale and this incredible interface and operating system, this product, but it's a closed ecosystem. And advertisers are pretty terrified that if Netflix absorbs HBO and they're thus, all of the data becomes somewhat opaque. You can't really see everything. Netflix has this track record of being notoriously secretive about viewing figures. I mean, they try to do it in this fairly basic way with these top 10 viewer leaderboards and things like that. But advertisers want a lot more than that in terms of the subcategories and demographics and so on. So yeah, I just thought that was quite interesting. And then this other area about the infantry squeeze. Which is about the economics. So high-quality video ads, so premium video, have the highest CPMs, so cost per thousand views in digital. And the risk here is if Netflix buys Warner Bros. Discovery, they corner the market on prestige TV impressions. And I guess that kind of leads us then into a bit of a segue as to the regulatory issues with this. And one thing I've seen is that Trump, I thought I had Trump all figured at the weekend. He was kind of like, no, no, no, don't like this Netflix deal. And then he flipped it. I think within the day he seemingly backed off that. So yeah, talk to me about Trump a little bit and is he actually the linchpin here on which direction this goes?

Yeah, you mentioned some very interesting things and let's talk about Trump in the context of antitrust. I think Trump loves this stuff, right? And there was no chance he wasn't going to wade in, especially because his son-in-law is part of the fin— Jared Kushner is part of the financing package on the Paramount side. And he obviously knows the major runners and riders and the cast of characters that I've just mentioned. So he'll want to wade in. And again, as we know with Trump, he'll say one thing and do another, or he'll say one thing and say the opposite the next day. And it'll create a bit of chaos, which is probably the word that will go down with his second term when we look back in history. So does he have the power to do anything? He doesn't technically have the power to influence, to opine from an antitrust perspective. That's the responsibility of the FTC and then the courts. And then, you know, this thing needs to be approved by international regulators as well, right? So this is, you know, we saw this a few years ago with the Activision and Microsoft deal. It took 2 years because we had regulators in different countries blocking it and opening it and all this kind of stuff. So yes, Trump is quite a nice little kind of whirling dervish to put into the mixer, but there's a lot of infrastructure behind. The people that really make the decisions might subtly in the back of their heads be thinking about, their jobs and the kind of pressure from Trump one way or the other. But there's a lot of kind of technocratic regulatory stuff that they're going to need to wade through. And I think if you take a look at the arguments from an antitrust perspective, you know, Netflix acquiring, uh, Netflix acquiring Warner Brothers, there are going to be significant antitrust issues, massive antitrust issues. I'm going to maybe break it down into 3. The first is, and you mentioned it previously, the first is the kind of monopoly concern, the pricing power concern. And you can split this one up into 2. The first is, all right, if Netflix, the £800 gorilla, buys studios, buys HBO Plus, there is going to be pricing power to the advertisers. You know, as advertising becomes a more significant revenue stream. For Netflix, you know, much bigger market share. You're going to have to advertise with us or bust because we're such a big beast. That's pricing power. That's monopoly power. Two, HBO Plus is cheaper than Netflix. So there is a danger that as soon as this thing gets incorporated, all of the HBO Plus subscribers will suddenly have to pay Netflix monthly subscriptions. They get more for their money, but is that a good thing? That's pricing power as well. And then the third thing, and you mentioned this in your notes and it's really important, get technical for a second. This concept of monopsony. So you have monopoly, which is, all right, this is anti-competitive, it's not good for the consumer. And then you have monopsony, which is this is anti-competitive, it's not good for the supplier. And this is the big threat. This is why Netflix is not that well liked in Hollywood. The big threat that the losers are going to be the scriptwriters, the actors, the content creators, the contributors to the ecosystem that ends up fueling the subscription revenue. And again, if you've got the £800 gorilla as the main player in town and you've got a script that instead of being able to maybe play Warner Brothers off against Netflix, you now only have Netflix. You're going to not be able to get the price that you potentially wanted. That is monopsony power. So those two things, if I was an anti— I mean, it's the number one streamer and the number three streamer coming together, right? That even that just as a very high level sends kind of alarm bells ringing. We'll see what happens.

How does it work with the other geographic jurisdictions? Because one thing I read was about if, you know, if it goes through in the US, might the EU be a regulatory problem as they might view the Trump-backed deal specifically because of concentration in sports rights? So in Europe there's Eurosport, Champions League, all that sort of stuff. Like, does Europe have, what sort of power do they have within this equation?

Yeah, they will be able to block it much like, and the UK will be able to block it and different regulators will be able to block it. And this becomes the amount of money that Netflix is going to have to spend on lobbyists and people going over to Australia and to Strasbourg and to London and go, actually, this is why this is a good deal. And what will happen is Netflix will put in place particular, you know, specific guardrails or specific policies that are concessions to these individual regulators, right? So maybe it gets signed off in the US, but maybe Europe wants, you know, a guarantee that there will be a competitive bid process on every new piece of content, right? And they have to say, yes, we'll do that for the next 5 years. And then it's a kind of free-for-all. So it becomes this big negotiation lobby. I mean, the lobbyists and the negotiators must be licking their lips thinking about this. Big paydays in store. And by the way, there'll be antitrust issues with Paramount as well, because they're two big studios, two big studios coming together. So watch this space. I reckon this is going to, this is going to have plenty of twists and turns, and I have no idea where it's going to end up.

I was going to say, like, given your experience, given what you've seen so far, given like the game theory that you love to run, like what, where do you reckon it heads to and who prevails in the end from the evidence at hand at this point in time?

Again, it's again, from a game theory perspective or just from a kind of strategy perspective, it's hard to bet against the biggest player in the room with the biggest firepower. The fact that Netflix has waded in and they've got an approved offer, and they've got all of that monetary firepower, which they can put into lobbying, into sweetening the deal if they want it. And we are in an antitrust environment, by the way, this would never in a million years get done under Biden and Khan. It's just not, it would just never happen. But now we've got a more conducive environment. If Netflix really wants this thing, they'll probably get it and it will probably go through. My biggest concern, just zoning out maybe as we conclude this, my biggest concern is if a company as big as Warner Brothers, which at the moment is a $70 billion market cap business, but steady state is probably more like a $35 or $40 billion market cap business. If these guys can't survive, as a going concern in terms of their scale, if they feel like the only real option for them is to sell to one of the big tech beasts, that sends a pretty kind of worrying precedent for almost every other tech adjacent company that doesn't have a market cap over $500 billion, that they're fair game potentially for one of these top 10, top 20 tech players. And that really is scary in terms of concentration, in terms of what you speak about a lot on your podcast with peers, like the Mag Seven and the concentration of the S&P 500 and the bifurcation in the way that the stock market is going. That's the thing that really concerns me here.

Maybe Netflix could have a backdoor agreement where they could go in, you know what they do with the sports. You know, docuseries sort of things. They could start filming the rest of the presidency as he goes through the midterms, keep it under wraps. So when he finishes his second term, out comes the Netflix Trump series. It's just, here we go.

It's, yeah, I mean, I would watch that in a second, obviously. Yeah.

Imagine going behind the scenes of Trump and seeing the Zelensky-Putin thing, the China trade thing, like if you had exclusive back behind the scenes access.

Yeah. I mean, in front of the scenes is mad enough, right? So, you know, we get quite a lot of it from just staring at the, staring at the content that's put out there already. But yeah, no, I'm in. I'm in.

Cool. Right. We'll wrap it up there. And remember, this is a bit of a breaking one. I know it's been out the story for a while, but wanted to get Stephen's take. Remember to stay tuned though, because our next episode will be Stephen's 2025 M&A year in review. Also touching on things like private credit, private equity in general, and also the outlook for 2026. So remember to like, subscribe wherever you are watching and make sure you tune in for that next episode. Thank you very much.