Morningstar

Netflix and Paramount Both Stand to Lose If Netflix Wins the Warner Bros. Auction

At any realistic price, we think a Netflix deal for Warner Bros. assets would be value-destructive.

The Netflix logo can be seen on a building belonging to the video streaming provider.
Andrej Sokolow/picture alliance via Getty
Securities in This Article
Netflix Inc
(NFLX)
Warner Bros. Discovery Inc Ordinary Shares - Class A
(WBD)
Paramount Skydance Corp Ordinary Shares - Class B
(PSKY)

CNBC reported that Netflix is the leading bidder to acquire Warner Bros. Discovery, and CNBC published a letter that Paramount sent to Warner Bros. alleging that the latter is running an unfair process. Paramount is likely bidding for all of Warner Bros., while Netflix is interested only in streaming and studios.

Why it matters: We think that any realistic amount Netflix would pay to acquire the Warner Bros. streaming and studio businesses would be value-destructive. On the other hand, we believe Paramount would benefit from the scale HBO Max would provide for its second-tier streaming service.

  • Netflix has around 90 million domestic subscribers and 300 million globally, while HBO Max has 58 million and 128 million, respectively. With substantial overlap, combined streaming revenue would decline, unless Netflix doubles its prices or runs separate platforms (neither of which we’d expect).
  • We’d expect Netflix to be much less aggressive than Warner Bros. in licensing TV shows to third parties and producing theatrical films, both of which are currently material sources of revenue. We wouldn’t expect cost savings on content ownership or other synergies to offset the lost revenue.

The bottom line: We maintain our fair value estimates for Netflix and Paramount, neither of which consider a potential Warner Bros. acquisition. Our fair value estimate for Netflix may decline if it wins the auction. The effect of a winning bid on Paramount is less clear and depends on the price.

  • Paramount has only 78 million global streaming subscribers, with a service that is critical to its future but not guaranteed to be viable over the long term without major strides. A combination with HBO Max would immediately give the firm this viability.
  • Even a seeming upfront overpay would be countered by more certainty for future growth, despite a traditional TV business in perpetual decline and less speculative investment or other concessions that would be required to make Paramount+ a top-tier streaming competitor.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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