Netflix May Change M&A Tune With Warner Bros: Analyst

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Watch Netflix May Change M&A Tune With Warner Bros: Analyst - Bloomberg on Dailymotion

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00:00All right, David, I mean, there's only a handful of companies that could afford to do this and

00:03even a smaller number of companies that would actually want to do this. Is this basically just

00:09Paramount Skydance is to have or are we going to see maybe a meaningful fight for this from some

00:14of the other players out there? I think it might become more than just Paramount Skydance now.

00:21I think that the company is looking for strategic alternatives. They're more actively marketing now

00:27that they had this press release come out this morning. They're considering another structure

00:32related to separating the company as an alternative whereby they could turn the studios and streamers

00:40business into the ongoing company and then spin off the cable networks. I think a lot possibly has

00:47changed earlier today. Netflix in the past, not too recently or not too far in the past has said that

00:54you know, we've historically been builders, not buyers, but that means historically and they've

01:00changed their tune. So it's possible that things could be coming to a head now. It might not just

01:06be the implicit backing of the Ellisons at Paramount Skydance at this party. I am curious about

01:12Paramount Skydance with Warner Brothers content under its umbrella. I mean, some of the criticism,

01:18particularly of their streaming service, was that the amount of content was relatively limited.

01:23They have a decent catalog, but nowhere near the breadth that we saw with what they built over

01:28at Warner Brothers Discovery. If you add that and then you take into account the live programming

01:34that Paramount Skydance has, would that make them more of a formidable competitor to Netflix?

01:41It would get them in that direction. But for the past decade or even 15 years, Paramount Studio has been

01:48really in a much smaller scale, which is, to your point, is why their library isn't as vibrant or is their

01:57production as big. But they do have that relationship partnering with Skydance on some content.

02:07But the platform that Netflix has globally, more than 300 million subscribers, means that they can

02:16allocate their content costs across a wider array of currently fully engaged subscribers. And that

02:24means that if they need to, Netflix can pay up for content rights. So Netflix is still in the

02:32leadership positions globally on the streaming side. Let's talk a little bit about what a potential

02:37deal for Warner Brothers Discovery would look like, because you take a look at some of the reporting

02:41out of CNBC when it comes to that Paramount Skydance bid, several bids actually, which were

02:47rejected. CNBC reported that the highest bid was below $30 per share. You think about where Warner Brothers

02:54Discovery shares were before all of this speculation started. They were around $12 a share,

02:59right now trading at about $20 per share. What do you think is a realistic valuation for the company

03:05at this juncture? I think a very base case would be $24 per share. But that's really using

03:14multiples that don't even reflect where some transactions have taken place. I think it's

03:20possible this could see $27 or $30 or more than that if you do have a vibrant auction process that

03:26does include the likes of possibly Comcast and Netflix being involved. I think that there's a

03:34lot of demand and interest for the Warner Brothers studio because it's been a very prolific producer

03:40on the TV or episodic side. And they also had a historic run this year with their theatrical releases,

03:48eight in a row doing like more than $40 million at the box office in the opening weekend. So

03:54I think this could become a robust process for that. But the company also needs a solution to monetize

04:01or drive the most value from the global network side of the business too. So I think that

04:08there's still some significant upside in Warner Brothers Discovery shares from here. And I don't

04:14think you should anchor where it's been in the past year or even back 18 months ago, the stock was in

04:21the $6 or $7 range that was just being kind of left for dead because of cord cutting. And then that was when

04:28the studio wasn't producing content because of the 2023 strikes that hit the industry. So I do think that

04:35recognizing the quality content capability in addition to the library, in addition to the global network

04:42platform that they have where they could use that as a roll-up vehicle, I think there's still a lot of value

04:48to be realized here. Right. Well, Warner Brothers shares finishing the day 11% higher as this

04:55continues, this speculation. David, while we have you, I do want to ask about Netflix earnings

05:00outright. This is a company that you cover. You can see shares down about 5% after hours. Their full

05:07year revenue forecast did meet estimates. There were some tax disputes down in Brazil. But overall,

05:12what do you make of what we heard from Netflix? I think the stock is overreacting by falling 5%

05:19because of the operating income hit. It was a one-time tax dispute reflection in their expenses.

05:27The revenues were in line. And the guidance for the fourth quarter on revenues are in line. But

05:33they had to nudge down their operating income margin guidance just because of this tax hit. If you take

05:39that out, it was a better than expected quarter. So I think that the headline number missing could be

05:47providing investors an opportunity to get back into Netflix if they do like the overall story.

05:54And I do think that the company is making really good progress on advertising. They're continuing to

05:58talk about advertising now more than doubling versus last year, which is roughly in line with our

06:03expectations. Again, advertising like subscribers is not a metric that they're disposing at this point. But

06:11I think that the downdraft in the stock right now is probably an overreaction.

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