Paramount Could Acquire Warner Bros. Discovery Sooner Than Expected. Here’s What That Means for Netflix Investors.
Netflix (NFLX +2.19%) once again finds itself on the outside of Hollywood looking in. The Silicon Valley disruptor looked set to take over one of Tinseltown’s most prized properties, Warner Bros. Discovery (WBD +10.79%), but a last-minute bidding war made Paramount Skydance (PSKY -2.94%) the winner after Netflix bowed out.
Now, after several state attorneys general sued to block the merger, a settlement is set to pave the way for the deal to be closed sooner than expected, possibly within the next couple of weeks.
Image source: Netflix.
Paramount and WBD catch a break
On Monday, Paramount settled with a group of state attorneys general, led by California’s Rob Bonta. The AGs had charged that the deal would violate antitrust laws, and a trial was set for next March, which would have delayed the merger through mid-2027.
As part of the settlement, Paramount will increase its domestic production by at least $300 million annually and will increase the percentage of films produced domestically if a federal film credit is approved. Currently, only around 5% of its film production is domestic.
Paramount also agreed to release 30 films theatrically in the first two years after the deal closes, and 32 in the following three years. It also must keep the Paramount and Warner Bros. production lots.
The terms of the settlement seem designed to protect traditional Hollywood and the thousands of people employed in the industry. It also helps out the movie theater industry with its guarantee of a set number of films to be released in theaters, avoiding the risk of the new company sending most of its top content straight to streaming.
Despite the agreement, Bonta was careful to add, “The settlement is not a vote of support for this merger.”
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What it means for Netflix
You might think that two of Netflix’s top rivals teaming up would be bad for the leading streamer, but I think the opposite is true.
Netflix dodged a bullet here, as it would have taken on significant debt to fund the deal, and the rationale for it never quite made sense. Investors seem to agree: Netflix stock drifted lower while the deal was pending, then jumped when Netflix backed off. The stock rose another 2% on Monday, while Paramount fell, showing that Netflix is seen as a beneficiary.
While WBD has some prized franchises, including the DC Comics universe, and plenty of classic titles like The Wizard of Oz, the company flailed in the public markets and seems to be getting bailed out only because of its content library. As an acquisition target, it looks like an albatross.
Paramount has struggled as well. Now, Netflix will face one less competitor following the merger, as Paramount+ and HBO Max will be combined into one streaming service. Additionally, Paramount will have a debt burden of around $80 billion, weighing on its profits and restricting its ability to make other acquisitions or possibly leverage its platform to its fullest potential.
Netflix emerges from this soap opera in a strong position as Paramount and WBD are now just one financially strapped competitor. Meanwhile, the usual pitfalls of an acquisition, such as integration challenges and culture clashes, apply, and Paramount could be hamstrung by the terms of the settlement.
That’s all good news for Netflix. On its own, the merger isn’t going to reverse Netflix’s recent stock slide, but the streamer looks like the clear winner. The new Paramount isn’t a threat to its streaming leadership, and if the execution goes poorly, Netflix could see a new wave of subscribers sign up.
