Netflix and Paramount Bidding War for Warner Bros

US entertainment giants surprise markets by going head-to-head in a battle to take over Warner Bros. Discovery, as streaming services look to expand their influence in movie-making and consolidate their portfolios.

The Market-Moving Developments

• Netflix won a bidding contest after Warner Bros launched a formal sale process, offering $27.75 per share in cash and stock for the company.
• After losing the formal bidding process, Paramount decided to go to shareholders directly with its $30 per share cash offer, starting a potential bidding war.
• The initiative is seen as consolidating the streaming space and disrupting the entertainment industry, including theatre companies that have been under pressure from poor ticket sales and underperforming box offices.
• Both offers raise antitrust concerns, but the WBD share price rocketed higher amid reports that the bidders could raise their bids.

Markets Betting on Better Deal

Shares in Warner Bros. Discovery have surged after the company announced last week that it had reached a $72 billion acquisition deal with Netflix. Several companies had been vying to acquire the film and television production company, and one of them decided to take matters a step further: Paramount offered $108.4 billion for the company on Tuesday. Warner Bros.' share price rose above the $27.75 offered by Netflix but below the $30 proposed by Paramount, suggesting that shareholders are optimistic about a better price but have doubts about being able to cement a deal. Both bids are subject to regulatory oversight and antitrust probes, with Paramount's recent merger with Skydance drawing significant scrutiny.

The focus of the deal implies impacts to the entertainment industry more broadly, including the "streaming war" and movie theatre companies. In announcing its agreement to buy Warner Bros., Netflix executives highlighted the value of the acquired catalogue of movies and shows over the production of new intellectual property (IP). Warner owns HBO and holds rights to popular shows such as The Big Bang Theory and to popular movie franchises such as Harry Potter. They suggest that including content will drive subscriber numbers and expect $1–2 billion in cost savings, with the deal becoming earnings accretive from the second year. Netflix already has its own film and television production company. Some analysts note that the consolidation of companies could mean more films are released on streaming rather than in theatres, which could affect demand amid this already beleaguered industry.

Consolidating Market and Antitrust Issues

Paramount's interest in Warner Bros includes the legacy assets, and the deal currently being offered is the same one that WBD executives previously rejected in favour of Netflix. Paramount's bid is backed financially by Middle Eastern investors and by Jared Kushner, the son-in-law of US President Donald Trump. Netflix's shares dropped after the deal was announced, while Paramount's rose, suggesting which firm traders believe stands to gain the most from the tie-up. However, the close connection with the White House could add another complication, given that Skydance barely won antitrust regulatory approval to acquire Paramount.

The expanded portfolio for either company could also pose a commercial challenge to streamer rivals such as Disney. Reportedly, Trump viewed the Netflix-Warner Bros deal with "heavy scepticism" because it would create a merger of the largest and third-largest streaming services. What could also whet investor appetite is Paramount Skydance CEO David Ellison suggesting that his company could increase the offer to entice investors to sell, even against the wishes of WBD executives. The share price is likely to remain active as Netflix evaluates a counteroffer.

Warner Bros Breaks to Multiyear Highs amid Bidding War

WBD stock has been on a tear since bottoming out at $6.70 per share in late summer, gaining nearly a 5x shy of 30s after forming a rounding bottom pattern. If resistance at $31.50 gives way to bulls, the next major levels lie at the 31.8% and 50% Fibonacci retracement levels of the $78-$6.70 leg, with higher long-term impact opening the door to record highs once again. However, with RSI in overbought territory above 80 on the weekly chart, momentum could fade for at least a reset at the 70 line, or even lower at the 50 line. The prior support level is at the $20 handle.

Source: SpreadEx | Warner Bros. Discovery, Weekly Chart