Netflix losing the Warner Bros bid is bullish

Paramount, an unprofitable debt-ridden company, has won the bid to buy another unprofitable debt-ridden company using tens of billions in new debt.

Netflix walks away with $3 billion in cash and a weaker competitor. That’s essentially your summary of the recent battle to takeover Warner between Netflix and Paramount.

And while I’m not a Netflix shareholder as of today, I think Netflix is the clear winner even while losing the bid.

$PSKY currently, as it exists today, has about $14 billion in debt.

It produces just $400 million in FCF annually and controls around $3 billion in cash sitting on its balance sheet.

$WBD has about $33 billion in debt, $4 billion in annual FCF, and $4 billion in cash sitting on its balance sheet.

Now, according to reports, this Paramount merger will be a huge $111 billion cash buyout for Warner shareholders, with $57 billion of the total number being financed with straight debt by Paramount.

Paramount will not be paying down Warner’s debt in this deal.

Meaning, when the two companies are combined, Paramount-Warner will produce ~$4.5 billion in FCF annually, with a combined cash balance of ~$7 billion.

But its debt balance will be a whopping (wait for it) $104 billion… almost as much as the value of the acquisition itself.

This deal would be one of the largest corporate buyouts ever and would leave the combined company with an unearthly amount of debt that would take 22 years to pay off. And that’s assuming every dollar of cash flow is spent consecutively towards debt payments and nothing else.

AND assuming profitability doesn’t slowly tank as cable networks and movie studios continue to become obsolete (which Paramount willingly wished to own).

For perspective, $NFLX will be left earning $10 billion in annual FCF this year, with just $12 billion in debt and $9 billion in cash, without any exposure to dying legacy businesses like cable or expensive Hollywood movie making.

It’ll also be taking a $2.8 billion termination fee paid by Paramount if Warner chooses to accept Paramount’s offer (which it already alluded to by saying it was “superior”)

Of course, the fight here was about IP for Netflix, and in Paramount’s case, access to media power for the Ellison family.

But on the business front, maybe Paramount can pull some IP strings and create a real viable competitor to Netflix through a new combined Paramount+ and HBO Max.

Though there’s a lot of ifs here.

Overall, if you’re a shareholder, Netflix seems to have gotten the better end of the stick. I’d be happy with this outcome.

Netflix can now continue with its content creation strategy and a capital light model producing incredible amounts of free cash flow without having to retain $50 billion or more in new debt and suffer from a declining interest in cable and film.

All while its main competitors ($DIS and Paramount) drown in debt.

Thanks for reading. Happy investing.

Stock analysis out soon: https://thejnicholas.substack.com

3,878 views

31 Comments

Kayvon Motamed@kayvon · 6mo

Now Netflix can buy them both at a discount in another 5 years =P

Jorge Gomez

@gomezmorillo · 6mo

3 billions free money for Netflix.

Phil @diversifiedfill · 6mo

I sold my $WBD during the boardroom battle. 🙂👍 I only got those shares as a spinout from AT&T.

Åll-ïz @shift4 · 6mo

Disney and sleep

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