Wall Street has begun rendering its verdict, at least in the short term, on Netflix‘s $82.7 billion deal to acquire Warner Bros.
As is typical with acquisitions, the stock of the buyer lost ground by mid-day Friday, slipping 3% to just below $100, while the party being (mostly) acquired, Warner Bros. Discovery, gained ground. WBD’s 5% rise was not stratospheric, but the shares had already doubled since reports started circulating in September that the company could be sold, meaning that much of the premium was already priced in.
Paramount stock has emerged as the biggest loser thus far, falling 8%. While the shares have climbed 17% since the August close of the Skydance merger, they are well off the 52-week high of $20.86 established in September.
Shares in Comcast, which was bidding against Netflix and Paramount for the WBD assets, ticked up 1%. Major exhibitors Cinemark and AMC Entertainment saw their stocks take a drubbing on investor fears that Netflix could alter the standard rollout of films in theaters, shortening or even eliminating theatrical windows. The company’s Co-CEO, Ted Sarandos, said the current operations of the Warner Bros. film studio, including its theatrical output, would stay as is for the near future. Releases in theaters for films through 2029 are established in contracts that would prompt lawsuits if they were to be broken.
Wall Street analysts, who had a chance to quiz Netflix management during a pre-market conference call about the deal, have slowly been digesting the news. “We admit that we are still coming to terms with the official announcement this morning,” wrote MoffettNathanson’s Robert Fishman in a note to clients.
Fishman went on to flag several concerns, citing signs of flagging engagement on Netflix, particularly in North America, as well as questions about HBO Max’s independence and the commitment to theatrical releases over the long term. The biggest question mark for many analysts is the regulatory outlook. Netflix expects the deal to close in the next 12 to 18 months, but questions abound, even with the streaming giant attaching a hefty $5.8 billion breakup fee to the deal.
“As concern from the creative community or other regulating bodies grows, Netflix could be forced to navigate a more complex regulatory process,” Fishman wrote. “Ultimately, we think the likelihood of approval comes down to how successful Netflix will be in defining the market beyond the traditional media landscape to include other companies like YouTube, Amazon, and other digital players like TikTok and social media as they compete for engagement across the total day.”
Doug Creutz of TD Cowen went a step further, writing in a research note that he expects the Netflix-WB deal to “face meaningful regulatory scrutiny.” He added his belief that “it is far from certain that the deal gets approved.” If it were to be blocked, he said, “it would open up a potential path” for Paramount to re-start deal talks. The David Ellison-led company has put in four bids for all of WBD, and earlier this week registered its strong objections to the way Warner has been conducting the process.
With WBD off the table (for now), Creutz warns that investors “will want to see more clarity for specific plans for the Paramount assets.”
