$111 billion results in a "full loss": Paramount(PSKY.US) barely wins, while Netflix(NFLX.US) avoids the bullet

The Hollywood century-long merger battle that attracted global attention has come to an end, with Paramount Global’s overflowing new acquisition plan of $111 billion coming out on top, but it was a fight where no one won.

Streaming giant Netflix (NFLX.US) rejected on Thursday to raise its bid for the majority of Warner Bros. Discovery’s (WBD.US) business, leaving this Hollywood conglomerate to rival bidder Paramount Global (PSKY.US). Despite the deal containing extremely tight safeguards, the $111 billion price tag still risks prolonging its loss-making situation.

Warner Bros. announced that Paramount’s all-cash offer of $31 per share was superior to its previous agreement with Netflix of $27.75 per share. That deal left a dwindling broadcast network that will be divested at questionable valuations and heavily indebted.

This struggle largely turned into a planning of a clear transaction path, just as it was about the money. Paramount’s ability to digest a much larger studio, its massive film library and intellectual properties, along with the accompanying television assets, raised serious doubts, including from the boards of Netflix and Warner Bros.

Owner David Ellison ultimately called upon his billionaire father, Larry Ellison, to alleviate concerns, which Netflix failed to do. Before the transaction was finalized, the burden fell on old Ellison, the founder of Oracle, whose stake in the cloud computing giant effectively backed the bid.

Even so, even if Paramount achieves its promised $6 billion in substantial synergies, merging it with Warner’s expected operating income and taxing it would still mean a return rate of less than 6%. Cost-cutting could still trigger political opposition, and the merger will attract antitrust scrutiny, no matter how close the Ellison family is to President Trump.

Meanwhile, interest costs will be a suspense. Given that Warner Bros. itself has been languishing under the heavy burden of massive debt since its merger with Discovery nearly four years ago, these interest costs look grim. Its stock price has fallen by about half over the five years leading up to the deal negotiations coming to light.

One consolation is that Warner Bros. Discovery is finally turning things around. Last year, the streaming profits of its crown jewel HBO doubled. Even so, Netflix may have dodged a merger bullet; after it withdrew from the bidding, its share price surged by 10%.

Warner Bros.’ deal can only compensate for a portion of the losses

Some scars will persist. This $360 billion company, led by Ted Sarandos and Greg Peters, has drawn the attention of authorities. A group of state attorneys general has expressed concerns about the merger plan, while the Justice Department has launched an investigation focused on Netflix’s potential market power.

Warner owner David Zaslav at least secured an astounding nearly 150% premium, along with unusually strict terms to compensate any investors who have held on until now. Of course, this generously overlooks the expensive opportunity cost, as the S&P 500 index has risen 80% over the past five years. The casualties of this war will linger for a long time.