WBD, Paramount regulatory path might be easier than Netflix tie-up

A day after Paramount Skydance emerged as the winner to take over fellow media giant Warner Bros. Discovery, questions are mounting about the companies’ regulatory path forward.

The WBD board said on Thursday that Paramount’s revised $31-per-share offer was superior to an existing bid from Netflix, prompting the streamer to announce that it was walking away from the deal entirely and clearing the way for Paramount.

Paramount’s raised offer — up from $30 per share — was the latest in a series of moves it made after it launched a hostile bid late last year to buy WBD. It had initially lost out on a bidding war to Netflix, which offered $27.75 per share.

Paramount’s latest bid also included a $7 billion breakup fee if the deal doesn’t win regulatory approval. And it agreed to pay the $2.8 billion breakup fee that WBD would owe Netflix if the deal fell through.

But media industry experts said it’s looking more likely that the Paramount deal will get through government scrutiny than it did when Netflix was in the picture.

Netflix co-CEOs Ted Sarandos and Greg Peters said Thursday that it was “no longer financially attractive” to match Paramount’s raised offer.

Though Netflix executives had said they were “highly confident” that their deal would win approval, the merger would have brought together two top streaming services — Netflix and Paramount+ — and could have potentially raised prices for consumers and decreased competition.

In early December, Trump said the Netflix-WBD deal “could be a problem” because of the increased market share Netflix would gain, saying he would be involved. He walked back those comments earlier this month, saying the deal would be at the sole discretion of the Department of Justice.

And while the size of a combined Netflix and WBD entity was one of the companies’ largest antitrust obstacles, that issue could still be raised for Paramount.

Both Paramount and WBD have sprawling portfolios of TV networks, in addition to Paramount+ hitting 78.9 million subscribers, according to its most recent earnings report, and HBO Max counting 131.6 million subscribers through the end of 2025.

Paramount executives argued one of the pros of their offer was that a deal with the media company would garner less government scrutiny. Paramount Skydance CEO David Ellison’s father, Oracle co-founder Larry Ellison, is known to have close relations with President Donald Trump.

Trump’s son-in-law, Jared Kushner, is backing the Paramount deal, according to a filing with the Securities and Exchange Commission.

Still, Paramount’s proposed deal had come under criticism for potentially being funded by the sovereign wealth funds of Saudi Arabia; Abu Dhabi, United Arab Emirates; and Qatar. The company has previously said that those entities have agreed to forgo all governance rights, including board representation.

California Attorney General Rob Bonta, a Democrat, warned on Thursday night that the merger was “not a done deal” and that the California Department of Justice, which has an open investigation into the deal, will be vigorous in its review.

And Democratic Sen. Elizabeth Warren of Massachusetts said in a statement that the Paramount and WBD merger is “an antitrust disaster threatening higher prices and fewer choices for American families.”

Analysts from Raymond James said they believe the Paramount-WBD deal could pose far less of a risk for regulatory approval than a Netflix tie-up.

In a Friday note, the analysts said the regulatory path forward for Paramount is “meaningfully easier” than Netflix’s, though it would not be a “cakewalk.”

“Of course, there are new challenges with this deal around news, cable networks, international linear networks, etc., but we still feel the WBD/PSKY deal is more palatable all-in,” the analysts wrote. “And, particularly following the reaction to the WBD/NFLX agreement, we believe PSKY’s political standing with the current U.S. administration is much stronger than Netflix’s.”

The analysts noted that questions remain about how the competitive market for the companies will be defined by the DOJ, and they speculated that Netflix likely decided not to match Paramount’s superior offer because of what was “likely to be a brutal regulatory review.”

A Friday note by Morningstar analysts echoed those thoughts. The analysts said the move was right for both Netflix and Paramount because they believed Netflix was unnecessarily overpaying for WBD’s streaming and studios.

Notably, Paramount aimed to buy the entirety of WBD, including its pay-TV networks, such as CNN, TBS and TNT, while Netflix only wanted the company’s studio and streaming assets.

“This is the best outcome for Warner shareholders, in our view, as we’ve felt that, with a higher likelihood of prompt regulatory approval and uncertainty surrounding the value and risk of the network business they would have retained, the best offer would have been $30 in cash,” the analysts wrote.

The analysts added that they don’t expect Paramount to face any regulatory issues during the approval process.

Joseph Kalmenovitz, an assistant professor of finance at the Simon Business School at the University of Rochester, said Paramount’s timing for the bid was likely strategic.

“David Ellison didn’t just outmaneuver a Hollywood board — he timed the regulatory cycle perfectly,” Kalmenovitz said. “The populist, big-is-bad philosophy is out; the deal-friendly establishment is back in.”

Still, Paren Knadjian, a partner at advisory firm EisnerAmper, said the regulatory path forward for Paramount remains nuanced and isn’t a done deal. While concerns over the Netflix-WBD deal focused largely on library content, the Paramount-WBD deal is far more of a “horizontal consolidation” effort between cable TV, sports, streaming and news, he said.

“I think the biggest thing we’re going to focus on is the concentration of intellectual property under one roof,” Knadjian told CNBC. “What power does that give this new entity in terms of the ability to charge more?”

Knadjian said Paramount will also be facing political concerns, not only from state and federal politicians, but between CNN and CBS combining under one roof, in addition to concerns over blockbuster franchises like “Star Trek” and “Harry Potter.”

Ultimately, the approval of the deal will come down to which concessions the two companies will have to make in order to assuage any fears over a possible media monopoly.

“The regulatory pressure, the political pressure, those are the things that will certainly delay the deal and will make it more complicated, and I think there’s going to have to be significant concessions for it to go through.

There’s so many factors to this. It’s much more complicated than many of the other deals we’ve seen in the past,” Knadjian said.

– CNBC’s Lillian Rizzo contributed to this report.