How high will Netflix go? This was once the question discussed across Wall Street regarding the streaming giant’s stock price. But lately, the debate has centered on whether the global streamer is prepared to outbid David Ellison’s Paramount for Warner Bros. Discovery if the latter’s board of directors decides Paramount’s sweet takeover offer is better than Netflix’s latest offer.
Wall Street analysts agree that deep-pocketed Netflix can easily defeat Paramount without causing financial headaches for its management team. Rather, the real question is whether it is willing to do so, and what the impact will look like for the stock beyond recent pullbacks related to the deal and other investor concerns, as well as the impact on Netflix management’s strategic narrative to date as a pure-play streaming company.
More from The Hollywood Reporter
Netflix shares closed at $103.22 on Dec. 4, the day before the WBD-Netflix deal was first announced. As of Tuesday’s close, the stock fell 24% to $78.04.
WBD is reviewing Paramount’s latest offer, while Netflix co-CEO Ted Sarandos signaled financial discipline and optimism about closing the deal and crossing the regulatory finish line. So where do Wall Street experts stand on this bidding war right now?
Bernstein analyst Laurent Yoon The state of the game is described this way: “If [Paramount] If the offer is high enough to push Netflix to respond — and the revised terms (such as financing guarantees) are as expected, or the offer is rich enough to allow WBD to take on some risk — the next logical question is: What’s Netflix’s next move, and how high can it go? ” Netflix’s balance sheet strength and free cash flow growth are enough to push the stock price to around $30, but that doesn’t mean it should,” he added. “
The Bernstein expert lists three angles to consider: debt leverage, stock price and CEO factors.
Yoon said the first issue isn’t actually a problem: “Netflix’s balance sheet and expected future cash flows can support a (much higher) bid.” “A price above $30 per share would put Netflix’s leverage at around 3x on 2027 EBITDA, but fall below 3x on 2028 EBITDA — a metric we think will be more important given the deal is likely to close if it goes ahead. We don’t think the deal would jeopardize Netflix investment-grade rating, but even if it is jeopardized, we believe the actual impact will be limited because Netflix has no need to issue new debt in the short term and leverage will normalize quickly, supported by growing EBITDA and free cash flow.”
If you’re wondering what Netflix’s investment-grade debt rating means, the key thing to know is that it indicates a lower default risk, allowing the company to borrow money at lower interest rates and on more favorable terms than so-called “junk” rated companies.
Yin similarly believes there are no real issues related to the stock price. “Perhaps the more relevant cap is how dilutive the deal will be to Netflix stock,” he stressed. “Assuming $1.5 billion in synergies by 2028 (50% of Netflix’s proposed $2-3 billion in operating expense savings), the company could be priced in the $30s. Additional synergies would only widen that headroom, providing further upside to the equity over the long term.”
But what about the CEO factor? “Ultimately, decisions are made by people, not spreadsheets. Numbers are important, but they will vary due to information asymmetry and what management chooses to believe,” Yin stressed. “While the ‘math’ supports a big move higher for Netflix stock, that doesn’t mean it should. Netflix has built a reputation for being disciplined in allocating capital — something management has emphasized time and time again.”
Bernstein analysts concluded: “If the price tag no longer makes sense for Netflix, and if the deal is likely to prevent Paramount-WBD from aggressively investing in growth in the near term, an exit would still be a completely rational outcome. If necessary, Netflix could increase its offer above Paramount’s latest $31 per share and still create value for shareholders (if the P/E ratio is not further penalized by the deal). Netflix’s ability to raise its bid depends on the certainty that it will realize synergies.”
MoffettNathanson analyst Robert Fishman There has been discussion about how much “discipline” Netflix will show in finding WBD. “By analyzing Netflix’s deal math, our base case sees no [financial] “Earnings per share will be accretive by more than $30 per share,” he wrote in a recent note focusing on the topic. In fact, “if EPS exceeds $30 per share and using our current estimates, the deal will begin to be moderately dilutive to 2028 EPS.” He emphasized that “any increase in the bid could further exacerbate Netflix’s already significantly depressed results.” [stock market] Valuation. “
However, Fishman concluded that the recently depressed stock price may help investors to some extent. His conclusion: “Given that Netflix shares are trading at depressed levels right now, investors win regardless. We see the long-term benefits of owning Warner Bros. “The assets are not properly reflected at these levels. But if Netflix walks away from the deal, the company’s core fundamental drivers of subscriber and ad growth and pricing power should rebuild investor confidence that WBD is indeed a ‘nice to have’ rather than a ‘must have’. “
Richard Greenfield, analyst at LightShed Partnerssuggested that Paramount could still walk away from the WBD business if it showed patience. “Given our belief that Netflix shares will rise at least 10%, Paramount’s only way to win is to significantly increase the dollar value of its bid,” he wrote in a Feb. 17 report before Paramount submitted its sweetheart bid. “In our view, $30 may have been too much to pay for WBD,” he warned in a report titled “Maverick, Don’t Do It: Ellison’s Warner Bros. Gamble Is a Mission He Should Give Up (For Now).”
Greenfield’s suggestion: “Paramount should simply let Netflix be the winning bidder and wait six months for Discovery Global to spin off from WBD. Paramount could then acquire Discovery at a significantly reduced price.” Global… assuming DG’s deal situation is as bad as Paramount thinks it is. While you may question why Paramount would still buy DG assets, we still believe it needs them to help remove costs from Paramount’s troubled cable network portfolio and leverage the portfolio’s linear cable network cash flow. Remember, despite all the challenges, Discovery Global’s cable networks are much better positioned than Paramount’s.”
If regulators do block the Netflix acquisition, WBD’s remaining companies could return to the auction market. “Paramount appears 100% confident that the WBD/Netflix deal will be blocked by regulators in the U.S. and in major global regions,” the LightShed analysts wrote. “Given Ellison’s repeated public statements that his current plans for Paramount following the Skydance deal do not require the acquisition of WBD, why not simply wait for Netflix What if the deal falls through? If Paramount exits today, it will have a stronger balance sheet, be able to invest aggressively in content, be able to focus on executing on Skydance/Paramount’s existing plans to acquire Discovery Global for far less than its implied value in WBD today, and then be able to acquire the Warner Bros. studio assets at a much lower price once the Netflix deal is abandoned due to regulatory concerns.”
Hollywood Reporter Picks
Sign up for the THR newsletter. For the latest news, follow us on Facebook, Twitter and Instagram.
