Netflix bets big on Warner Bros

Netflix bid $82 billion for Warner Bros Discovery on 5 December. The all-stock offer would put the world's biggest streaming service together with Hollywood's grandest old studio, and within hours investors were arguing over the price and over whether regulators would ever allow it.

A studio already for sale

Warner Bros Discovery has been looking for a way out almost since it was formed in 2022 by merging WarnerMedia, which AT&T had spun off, with Discovery. The combination was built on borrowed money just as cable audiences began to shrink faster, and its shares spent most of the following years well below their starting level. In June the company said it would split itself in two, separating the studios and streaming business from the cable networks. Unsolicited approaches from Paramount Skydance followed, the board opened a formal sale process in October, and Netflix emerged as the winning bidder against Paramount and Comcast.

For Netflix the move breaks with its own history. The company grew by building rather than buying, spending heavily on original programmes and licensing other studios' catalogues while leaving legacy media to consolidate among themselves. Bidding for Warner is an admission that owning a deep library outright is worth more than renting it, particularly as rival studios pull their best titles back for their own services.

Buying the back catalogue

Netflix would take in Warner's library, from DC Comics and HBO to the Warner Bros film archive, along with production operations around the world. The combination would leave it with a grip on global entertainment that rivals would struggle to loosen. Warner Bros Discovery carries more than $35 billion of debt and a set of shrinking cable networks, so for its shareholders the deal offers an escape into the stock of the market leader.

The strategic logic is about distribution. A franchise such as Batman or Harry Potter earns more when it can be pushed to Netflix's global subscriber base than when it sits behind a smaller service like HBO Max. Netflix's recommendation engine and its presence in almost every country give old titles a second life, and new productions can be planned for a single worldwide release. Those gains are real, although they are easier to describe in a presentation than to measure in a spreadsheet.

Netflix shareholders pay

Netflix investors see it differently. Tens of billions of dollars of new shares would be issued to buy a studio's overheads and a cable business in decline, which would drag down operating margins and returns on capital.

The mechanics of a share-based deal sharpen the concern. Every new share issued to Warner's investors gives them a claim on Netflix's future profits, so the deal only adds value if Warner's contribution grows faster than the enlarged share count. Netflix would also take on responsibility for Warner's debt, turning a company that has funded itself largely from operating cash into one with a heavy interest bill. And because the consideration is paid in stock, a fall in Netflix's share price during the long approval period would cut the value Warner holders receive, which gives both sets of investors reason to watch the regulators closely.

History is not kind to transformative media mergers paid for in shares. AOL's purchase of Time Warner in 2000, the largest of its era, used a richly valued new-media stock to buy an old-media empire and ended in one of the biggest write-downs in corporate history. Netflix is a far more profitable business than AOL was, and the comparison can be pushed too far, but the pattern of a high-flying buyer paying with its own paper for assets in structural decline is a familiar one.

Washington and Brussels

The antitrust review will turn on how officials define the market. If the relevant market is subscription streaming, the combination of the largest service with HBO Max looks like the kind of concentration regulators exist to stop. Netflix will argue that it competes for viewers' time with YouTube, which Nielsen's measurements show as the most-watched streaming platform on American televisions, and with free television, gaming and social media. Cinema owners and guilds, wary of Netflix's long reluctance to release films in theatres, are likely to lobby against the deal.

The closest precedent is encouraging for the buyer but slow. The Justice Department sued to block AT&T's purchase of Time Warner in 2017 and lost in court the following year, which showed that a vertical media deal can survive a challenge. That fight took the best part of two years from announcement to completion, and a horizontal combination of two streaming services invites harder questions. The European Commission will run its own review, and the deal will also have to clear shareholder votes and the separation of Warner's cable networks.

The winners and losers outside the two companies are easier to name. Warner's bondholders stand to gain if their debt ends up backed by a larger, more profitable parent. Rival services such as Disney+ and Paramount+ would face a competitor with both the largest audience and one of the deepest libraries, and could lose access to Warner titles they now license. Producers and talent agencies would have one fewer independent buyer to bid up the price of their work, which is why the guilds are likely to object as loudly as the cinemas.

What could change the verdict

The case for Netflix rests on the view that it can extract far more from the library than Warner ever did and that the cable networks can be ring-fenced or sold. If Netflix's shares hold up through the review, and if it shows credible plans to cut duplicated costs and keep Warner's films in cinemas, the dilution may look like a fair price for decades of intellectual property. The signals to watch are the regulators' first requests for information, the terms of any remedies offered and whether a losing bidder returns with a higher offer.

Old Hollywood is selling out to the streamers. Netflix gets the library and its shareholders get diluted, and the deal will probably spend the next year or more in front of antitrust officials in Washington and Brussels. Warner's investors hold the better side of the bargain, while Netflix holders carry the regulatory risk and the debt until the deal closes, if it closes at all.