Netflix backs out of Warner Bros acquisition, hands victory to Paramount

It’s already been a wild ride but in a twist few saw coming, Netflix has refused to increase its offer to buy Warner Bros, effectively handing the legacy studio to rival bidder Paramount.

The shock update happened mere hours after Warner Bros signalled an improved offer from Paramount was the “superior” transaction and gave Netflix four days to either match or raise its proposal.

Instead, Netflix has decided to stay at the level it’s at, which will push Warner Bros to accept Paramount’s offer and hand Netflix a $US2.8 billion break-up fee.

In a statement, Netflix said, “The transaction we negotiated would have created shareholder value with a clear path to regulatory approval. However, we’ve always been disciplined, and at the price required to match Paramount Skydance’s latest offer, the deal is no longer financially attractive, so we are declining to match the Paramount Skydance bid.”

The deal Warner Bros and Netflix signed in December was valued at $US27.75 per share for Warners’ studio and streaming assets, which valued those units at $US82.7 billion. Paramount had initially proposed $US30 per share for the entire business, which also included its cable channels including CNN.

Paramount raised its offer to $US31 per share this week after Warner Bros agreed to reopen talks after the David Ellison-controlled company launched a hostile takeover bid when it lost the original competitive process.

Warner Bros president and chief executive David Zaslav in a statement wished Netflix well for the future and added, “Once our board votes to adopt the Paramount merger agreement, it will create tremendous value for our shareholders”.

The tussle for Warner Bros has been the most closely watched battle in the entertainment industry for months. The outcome will be consequential for the future of Hollywood as another one of the five major studios is swallowed up by the forces of consolidation.

The bidding process began in earnest after Paramount, recently taken over by Ellison, son of tech billionaire Larry Ellison, made two unsolicited offers to buy Warner Bros.

Both were rejected by the board but it kickstarted a process in which Warner Bros in October officially put itself up for sale. Comcast, which already owns NBCUniversal, was the third bidder in addition to Netflix and Paramount.

Once Netflix emerged as the initial victor with a signed deal, Ellison aggressively fought against the result. Under a hostile takeover, Ellison appealed directly to Warner Bros shareholders and launched legal action, alleging an improper bidding process.

All the while, Netflix was on hustings, trying to quell anxieties within the industry about its plans.

Chief among concerns about a Netflix takeover was that the streamer has historically been hostile to cinema releases, and that with Warner Bros under its control, the theatrical business would be endangered.

Netflix co-chief executive Ted Sarandos then committed to keeping a 45-day exclusivity window between cinema release and home entertainment platforms for all Warner Bros films.

Sarandos argued that it was the better suitor because there were fewer crossovers between its existing operations and those of Warner Bros, and there would therefore be less cost-cutting in the merged business.

Warner Bros also owns HBO, the premium TV brand behind hits including Game of Thrones, The Sopranos and Veep, and Sarandos had said Netflix would largely leave HBO to be run as it is now.

Paramount also had many detractors, with critics pointing out that since Ellison took over Paramount last year, its US TV network, CBS, had lurched to the right, seemingly in a gesture to appease Donald Trump and his administration.

One of Ellison’s most controversial moves was to appoint Bari Weiss, a right-wing commentator, as the head of CBS’s news operations. Ellison’s father, Larry, is seen as close to Trump.

Because of the Ellisons’ alignment with Trump, Paramount has argued that it would have the easier regulatory approval process through the government including any anti-trust investigations by the Trump-controlled Department of Justice.

Sarandos was in Washington on Thursday local time meeting with government representatives but it’s not known if an audience with Trump was on his calendar.

Trump had previously given contradictory comments over his personal intervention in any potential transaction, having said he would be involved and also that he would stay out of it.

But earlier this week, he demanded on social media that Netflix sack board member Susan Rice, a prominent Democrat who has served in the Biden, Obama and Clinton administrations. He threatened that Netflix would “pay the consequences” if she stayed on the board.

There was also a round of cost-cutting once Ellison took over Paramount, and Ellison has flagged there could be up to $US6 billion in money saving in a potential Paramount-Warner Bros merger.

Sarandos has previously contended that Paramount would cut $US16 billion out of Paramount, resulting in mass job losses.

There were also concerns that part of Paramount’s financing for the Warner Bros acquisition came from Middle Eastern sovereign wealth funds.

In its statement, Netflix added it still believed it would have been a “strong steward” of Warner Bros’ brands and that it was the better deal for the future health of industry, but it was not a win at all costs pursuit.

“This transaction was always a ‘nice to have’ at the right price, not a ‘must have’ at any price.”