Netflix Wins Warner Bros. Auction, but at an Exorbitant Price

Netflix plans to pay 25 times estimated 2026 EBITDA for Warner Bros. Discovery’s streaming and studios business, which strikes us as exorbitantly high, even with the premier, unique assets Netflix will acquire. Regulatory approval is highly uncertain.

Why it matters: Warner Bros. shareholders will win big if the deal is approved. In addition to $27.75 per share in cash and Netflix shares, they will still hold the remaining Discovery Global business, which is worth about $3 per share at the $27 billion enterprise value we think is reasonable.

• It will be difficult for Netflix to realize the full value of this $83 billion investment, especially considering the overlap of HBO Max and Netflix subscribers. Netflix doesn’t need to tap HBO Max’s scale or content, so this price seems like a reach.
• Netflix anticipates cost savings will bring the acquisition multiple to 14 times 2026 EBITDA, which is still leaps and bounds ahead of what Warner’s unaffected share price implied. We also expect revenue dyssynergies from overlapping subscribers.

The bottom line: We think regulatory approval is a toss-up. We anticipate raising our fair value estimate for Warner Bros. to around $25 per share from $20 to reflect a 50/50 chance of approval. Those odds should lead us to modestly reduce our fair value estimate for Netflix, leaving its shares substantially overvalued, in our view.

• CNBC reported that the White House is very skeptical of the deal. Since the deal only needs Federal Trade Commission approval, the administration cannot unilaterally block it.
• However, the administration can have a heavy influence. A lawsuit to block the merger could reasonably have bipartisan support. An antitrust case could be strong, centering on the common ownership of the top and fourth-biggest streaming platforms in the United States.

Coming up: Paramount Skydance PSKY could still be lurking. Representatives of the company have grumbled about the auction process, and they could take another bid directly to shareholders. However, its path is now more complicated and expensive.