After a few marathon days of telephone and video calls, emails and text message chains, the $82.7 billion agreement for Netflix to buy Warner Bros. and HBO Max was clinched Thursday night around 10 p.m. ET.
But there was no chance for high fives or a group huddle among the managers of the freshly betrothed media giants. In modern fashion, the sale negotiations were mostly conducted at arm’s length via phone and electronic communications, with Netflix and WBD executives and legal teams spread across New York, Los Angeles, Washington, D.C. and other locales.
Among the final hurdles to securing the initial agreement was WBD’s insistence that Netflix commit to a record-setting $5.8 billion breakup fee should the deal run into resistance, regulatory or otherwise.
Opposition to the deal assembled, swiftly and fiercely, from unions, consumer watchdogs and politicos on both sides of the aisle. “This merger must be blocked,” the Writers Guild of America urged on Friday.
In the end, about six weeks after Paramount CEO David Ellison’s pushy overtures put the studio in play, the Warner Bros. Discovery board got what it wanted – a pedigreed, market-leading buyer with firm financial foundation and a clear strategic need to make the most of Warner Bros. and HBO.
On the surface, the Netflix deal would seem an echo of the AOL-Time Warner transaction completed in January 2001. A highflying beacon of what was then called “new media” buys a legacy entertainment company with brands that seem to be ripe for exploitation in new ways.
The AOL takeover of Time Warner, of course, was nothing less than disastrous. The grand thesis of the merger unraveled in barely a year’s time after the dot-com bust and the 9/11 terrorist attacks. This time around, the Netflix acquisition signals the (near) conquest of Southern California’s most dynamic industry by one of the world-beating tech giants that sprang from Northern California.
The WBD board leaned toward the Netflix bid because the company has such a strong balance sheet. Its stock has been one of the most consistent and durable performers over a turbulent decade for media and entertainment. Unlike AOL in 2001, when its growth was powered by offering basic dial-up internet access, Netflix has a strong underlying business model that can’t easily be outmoded by new tech or undercut on price by rivals. TV shows and movies are, after all, very sticky – ask any “Bridgerton” or “Strangers Things” fan.
Netflix’s long-horizon outlook stands in contrast to Paramount Skydance, which began its pursuit of WBD shortly after Skydance Media sealed its $8 billion acquisition of Paramount Communications. It’s a sign of the times that the parent company of Paramount Pictures and CBS – two entertainment institutions that have been around for more than 100 years – are a bigger risk than a much younger venture that has been in the original programming game for about a dozen years.
Paramount Skydance faces an uphill climb in turning around the fortunes of its studio and legacy cable networks and restoring strong free cash flow. The company is also carrying more debt on its balance sheet than Netflix, proportionate to its earnings power. All of these factors were a consideration for the WBD board. In the case of a black-swan event for the macro economy, how would Paramount fare?
The lack of certainty there helped sway WBD board members that Netflix was the better fit and safer option for shareholders than Paramount or even Comcast, which was the third contender for the studio in the whirlwind bidding process that began in earnest in early November. The process quickly crystallized into a test of wills between two Davids – Ellison and WBD CEO David Zaslav. There’s been endless industry chatter that Zaslav was angling for a deal that left him with a high executive perch in the resulting company. Ellison slammed the WBD leader in a legal letter sent to Zaslav on Thursday accusing him of having “abandoned the semblance and reality of a fair transaction process” in order to steer the deal to Netflix.
WBD board members were already put off by Paramount’s unsolicited offer and the whispers around Hollywood and D.C. that only Ellison and his familial connections to the Trump White House would be able to secure regulatory approval for such a big merger.
But Donald Trump is famous for working his phone, and Netflix co-CEO Ted Sarandos is definitely in his contacts. President Trump respects Netflix’s rags-to-riches growth as a modern American business success story. And while Trump often expresses hostility to Hollywood as a bastion of touchy-feely liberalism, the reality is that he has long been fascinated by the industry, especially after he became a TV star via NBC’s “The Apprentice.”
Sources close to the situation emphasize that even in Hollywood, ego takes a back seat to business rationale when the enterprise value tops $82 billion.
Netflix and WBD leaders including Zaslav are preparing to make a strenuous case for the consumer benefits of the deal as well as the positive impact that the enlarged company will have on the creative community.
Zaslav, Sarandos and Netflix co-CEO Greg Peters are bracing for a long fight. The leaders are projecting a closing timeline of as much as 18 months given the scrutiny on the companies and the political crosscurrents.
There are points to be gained for elected officials on the left and right by railing against another big media merger. That could make for a long drawn-out battle in Washington with the Federal Trade Commission and Justice Department. The FCC is not expected to play much if any role in this review because of the nature of assets involved – WBD does not own broadcast TV stations (a la Paramount) or cable systems (a la Comcast).
Sources said the Netflix and WBD teams are confident that on the antitrust merits it’s hard to prove the enlarged company would have anything close to monopoly power over the content marketplace –particularly at a time when Netflix, HBO and others have for-real competition for the hearts and minds of younger viewers from likes of YouTube and TikTok.
In their first presentations about the deal on Friday, Netflix and WBD emphasized how little overlap there is between the companies. Netflix has stated its intention to maintain HBO Max and Warner Bros. studio operations as standalone businesses under the Netflix tent. Anyone who has experienced a Hollywood merger in recent decades knows that no matter what is said in the moment, the long-term arc of any business leans toward streamlining, efficiencies and eliminating redundancies. Consolidation will eventually affect some on the list of accomplished senior executives who are spread among Netflix, Warner Bros. and HBO.
For the most senior executive at WBD, however, the future does seem to be coming into focus. Sarandos and Peters are firmly installed as Netflix co-CEOs. Zaslav has been telling friends and colleagues that he’s focused on helping to get the merger to the finish line and to deliver a healthy Warner Bros. and HBO Max to Sarandos when it’s time to hand over the keys.
If the deal goes through as it was outlined to investors today, Zaslav will eventually lose his CEO perch but he’ll gain many, many millions (as will a host of senior WB and HBO executives through stock options), as well as the satisfaction of having gone out on his own terms.
variety.com
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