Barring a crazy development, Netflix will own Warner Bros.

To borrow a phrase you might hear during election night reporting: the path to victory for Paramount Skydance in its bid for Warner Bros. Discovery is narrowing. In fact, unless Paramount decides to change its tune, this fight is basically over.

Let’s recap: Paramount came out Thursday and said it was reaffirming its hostile takeover offer to buy Warner Bros. Discovery, saying its previous round of modifications had “cured every issue raised by WBD.” The Warner Bros. board, the kingmaker in this M&A process, clearly disagrees with that notion, having already rejected the terms of that offer. 

If you read between the lines, what’s really happening here is that Paramount is saying “uncle” by refusing to sweeten its current offer. Barring Paramount coming back to the negotiating table with a higher offer, or something else crazy happening, Netflix has beaten out Paramount for ownership of Warner Bros. Discovery. 

After years of running M&A coverage, I can pretty confidently say Warner Bros.’ board is not going to change its mind if things stay as is. So let’s talk about the potential crazy developments that might put the deal back in peril for Netflix, and how likely they are to happen.

One thing that could change the landscape here is a signal from the Trump administration that it would challenge the Warner Bros.-Netflix deal on regulatory grounds. President Trump has been asked about this in the past, and his responses weren’t definitive. At one point, he said Netflix taking over Warner Bros. “could be a problem.” A day later, he said: 

“I know the companies very well. I know what they are doing. But I have to see… what percentage of market they have. We have to see the Netflix percentage of market, Paramount percentage of market. I mean, none of them are particularly great friends of mine. I want to do what’s right.”

Remember that Paramount Skydance is run by David Ellison, the son of close Trump ally and the Paramount’s deal backstopper Oracle billionaire Larry Ellison. Could the Trump administration have solid legal ground to challenge the deal based on the market size of the combining companies? Probably, but that picture is murky based on how you define the markets. Would this administration challenge a deal because it wants a friend’s deal to happen instead? I think it’s pretty unlikely. But let’s be real here: it has done crazier things than that. 

The other potential avenue for a Paramount win is the fact that its bid is hostile, meaning it is appealing directly to Warner Bros. shareholders. Paramount is basically saying to anybody who owns a share of Warner Bros., “Give us your share, and we will pay you $30 in cash.” The goal is to acquire a majority of shares (unlikely) or at least buy enough to make noise to the Warner Bros. board that it’s wrong in rejecting the deal because many shareholders have decided to take its offer instead.

There are two problems with the hostile offer. One is that, to tender the shares to Paramount, you have to do this, all of which is pretty high-friction, according to Paramount: 

And two is that the Paramount offer, at least on its face, sure looks financially inferior to Netflix’s! Paramount is offering $30 per share for the entire company. Netflix is offering a combination of cash and stock valued at $27.75 per share, as of when the deal was struck, for most of the company, but allowing for the company to also realize additional value by spinning out its cable TV networks business, called Discovery Global. That business, The Wall Street Journal has reported, could be worth several dollars per share. Of course, Paramount says its own analysis values that business at $0.00 per share. Convenient that they think it’s not worth even a penny!

There are nearly 2.5 million Warner Bros. shares outstanding. Do we think a significant enough number of WBD shareholders are going to jump through the aforementioned hoops to take a deal valued at $30 over a deal potentially valued at $31 or $32? And that doesn’t even factor in the multibillion-dollar breakup fees that would come with backing out of the Warner Bros.-Netflix deal first. 

Unless Paramount comes back to the table, the only thing I can envision that would jeopardize Netflix’s win here is a Trump regulatory challenge. That’s pretty unlikely. 

But hey, stranger things have happened.