Warner Bros Seeks Paramount's "Best and Final Offer," Upside Ahead?

Shares of entertainment giant Warner Bros. Discovery (NASDAQ: WBD) are moving up after the latest development in its acquisition saga. On Feb. 17, WBD shares closed up by approximately 2.7%.

The catalyst for this move was WBD's latest press release. WBD stated that it will initiate discussions for Paramount Skydance (NASDAQ: PSKY) to provide its “best and final offer” in its efforts to acquire the firm. At the same time, WBD continues to unanimously recommend that shareholders approve Netflix’s (NASDAQ: NFLX) offer.

Overall, this news is leading investors to believe that the final purchase price to buy WBD will move higher. Let’s dive into the specifics of the announcement and the latest rumors surrounding it to decipher what it all means for WBD stock.

Netflix Grants Waiver, Putting the Ball in PSKY’s Court

Netflix has granted WBD a seven-day waiver, permitting the firm to engage with Paramount Skydance on a revised acquisition proposal. At first, it's unclear why Netflix would agree to this, considering that it already has a deal with WBD in place. However, there are legitimate reasons for Netflix’s decision.

The company understands that despite having reached an agreement with WBD, Paramount isn’t going to stop fighting. By permitting this seven-day waiver, which ends on Feb. 23, Netflix is seeking to put the bidding war between it and PSKY to bed.

On March 20, WBD shareholders will vote on whether to approve the Netflix deal.

With this deadline quickly approaching, Netflix likely wants to get everyone’s cards on the table as soon as possible. If Paramount wants to buy WBD, now is the firm’s time to put up or shut up. 

By accelerating PSKY’s bidding process, Netflix has time to calibrate a response prior to the March 20 deadline. Importantly, Netflix retains the right to match whatever new offer Paramount provides.

Agreeing to the waiver also improves the optics for Netflix should it eventually win the deal and then proceed through the regulatory approval process. It allows WBD to argue that it satisfied its fiduciary duty by seeking the best possible deal for shareholders, something that regulators will likely consider.

PSKY’s Offer Could Move to $31 or Higher, But Issues Remain

In regard to WBD, the following quote from the firm’s press release is particularly interesting.

“On February 11th, a senior representative of your [PSKY's] financial advisor communicated orally to a member of our Board that PSKY would agree to pay $31 per WBD share if we engage with you, and that $31 is not PSKY's best and final proposal.”

This creates a strong expectation that PSKY’s next offer will be at least $31 per share. This would be above the firm’s previous $30-per-share offer. It would also be in the mid-to-upper range of the approximate value that the Netflix deal would provide WBD shareholders, between $28 and $33.

Notably, Paramount previously stated that it would pay Netflix the $2.8 billion break-up fee if WBD accepted its offer. This has been one of the key issues preventing WBD from moving forward with Paramount’s bid.

Despite agreeing to this and additional financial enhancements, WBD maintains a long list of other concerns that it wants PSKY to iron out. These issues surround financing fees, which company exerts control over WBD’s operations before closing, and certainty regarding Paramount’s funding sources.

Although Paramount’s offer is all cash, it will generate much of that cash through financing. However, if market conditions or business fundamentals worsen, PSKY’s borrowing costs may increase, or funding could disappear altogether. This could undermine Paramount's economic incentive to proceed with the agreed-upon deal, prompting it to renegotiate with WBD. Additionally, the deal could fall through entirely.

In the end, this could potentially leave WBD with a worse deal than it would have received from Netflix. To rectify this concern, WBD wants a commitment from PSKY that if debt financing falls through, PSKY’s owners will make up the difference using their own cash.

WBD Continues to Be in a Strong Position

Ultimately, WBD believes that PSKY’s current offer is structurally risky compared to Netflix’s offer. Even if the headline value of Paramount’s bid is higher, WBD currently sees more avenues for it to fall through or face renegotiation.

For WBD shareholders, the implications of this news are positive. Further upside moves could come if PSKY’s bid increases and financing terms improve. This could also bring Netflix back to the table, leading them to increase their bid. Meanwhile, Netflix’s current offer should provide downside support.

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