Warner Bros. Discovery: Acquisition Talks Reopened for Paramount as Vote on Netflix Offer Is Set

Key Morningstar Metrics for Warner Bros. Discovery

• Fair Value Estimate: $28.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

With Netflix’s NFLX approval, Warner Bros. Discovery WBD has re-engaged in negotiations with Paramount Skydance PSKY in pursuit of the best deal for shareholders. Talks will remain open through Feb. 23, and Paramount has said it is willing to improve its offer to buy all of Warner for $30 per share in cash.

Why it matters: Warner maintains that Netflix’s offer—$27.75 per share in cash for Warner’s streaming and studios businesses only—is superior, but the firm is finally entertaining the possibility that Paramount can offer a better deal after numerous amendments to address Warner’s concerns.

• Judgment on which deal is better will depend on the value assigned to the networks business, which Netflix won’t acquire, and non-monetary factors, like the timeline, the likelihood of closure, and the detriment to Warner if its chosen deal falls through.
• We expect Paramount will offer more than $30 per share within the week, and that Netflix could potentially respond by increasing its offer. We doubt Paramount will drop its lawsuits if Warner chooses Netflix, but the subjectivity in choosing between these offers makes success unlikely.

The bottom line: We maintain our stance that Warner is likely to be acquired, potentially at a value of more than $30 per share, and that neither Netflix nor Paramount has a greater than 50% chance of acquiring it.

• With that backdrop, we maintain our fair value estimates of $79 for Netflix, $20 for Paramount, and $28 for Warner, with only the latter’s valuation adjusted for the likely acquisition (and discounted for the time value of money). Our standalone fair value estimate for Warner remains $20.

Between the lines: According to Warner, Paramount said it will offer $31 per share, in what will still not be a “best and final” offer. Warner still cites other factors that Paramount must address, but at some price, we expect those factors to become secondary to a chance for clearly higher remuneration.