Paramount is betting on European regulators to block the WBD-Netflix deal

A version of this article first appeared in the CNBC Sport Newsletter with Alex Sherman, bringing you the biggest news and exclusive interviews from the world of sports business and media. subscription To receive future issues, directly to your inbox.

future Warner Bros. Discovery The company — its popular movie studio, HBO Max, and its cable networks, including CNN, TBS, TNT, Discovery, and HGTV — may come up with what European regulators have in mind. Netflix.

This is a very crazy development for a deal that will determine the future of many valuable American sports rights – assets that, for the most part, have no connection to Europe.

A quick refresher: WBD owns several live sports rights in the United States, including the rights to March Madness, Major League Baseball, the National Hockey League, NASCAR, the French Open, AEW, the College Football Playoffs and others. But those rights will not go to Netflix under WBD’s agreed-upon deal to sell some of its assets to the streaming giant.

Netflix agreed to pay $27.75 per share for its movie studio WBD and its streaming business, but not the cable networks that own the sports rights. If the deal is approved, those networks will be spun off into a separate publicly traded entity called Discovery Global, which will also own Bleacher Report, House of Highlights and other WBD digital assets.

If WBD shareholders accept a hostile takeover attempt from… Paramount SkydanceHowever – if this deal is approved – the cable networks and associated sports would all fall under the Paramount umbrella. Paramount made an offer of $30 per share for the entirety of WBD—an offer it made directly to shareholders after WBD’s board of directors rejected it.

Paramount on Thursday extended the deadline for the tender offer — which expired Wednesday — giving WBD shareholders more time to evaluate the option.

WBD responded with a statement, noting that less than 7% of all shareholders have so far tendered their shares to Paramount.

“Once again, Paramount continues to make the same offer that the Board of Directors has repeatedly and unanimously rejected in favor of a superior merger agreement with Netflix. It is also clear that our shareholders agree, with more than 93% also rejecting Paramount’s blueprint,” WBD said. “We are confident in our ability to obtain regulatory approval for the Netflix merger and look forward to delivering the tremendous and proven value that our agreement will provide to Warner Bros. Discovery shareholders.”

Most of the media attention has focused on what US President Donald Trump might think about the Netflix-WBD deal. Netflix co-CEO Ted Sarandos met with Trump ahead of the deal to gauge his sentiment on the deal. The US Department of Justice – a body that is theoretically independent from the presidency – will ultimately decide whether the deal presents antitrust issues, whether those issues can be improved with conditions or whether it is simply too big for the deal to go through.

There has been much less interest in Europe, which would also need to approve the deal. This is where either deal could fall apart.

Netflix is ​​a global company, generating revenue of about $14.5 billion in its EMEA region last year, or about 32% of total sales.

WBD feels confident that its deal with Netflix will win EU approval, according to people familiar with the matter. A source at WBD said there was “95% certainty” that Europe would approve the deal, though the person acknowledged that Netflix may need to agree to certain conditions, such as agreeing to produce a certain amount of local content in Europe and promising to release films in theaters. The EU Audiovisual Media Services Directive already requires that video-on-demand streaming services ensure that at least 30% of programs in EU countries qualify as European works.

Paramount disagrees, and believes the Netflix deal has very little chance of getting past European regulators, according to people familiar with the matter. Meanwhile, the company is working on its EU regulatory corners regarding the proposed acquisition.

It would be unusual, but not unprecedented, for European regulators to block a deal between two US-based companies. Amazon It dropped its $20 billion acquisition of cloud software company Figma in December 2023 after deciding there was no “clear path” to antitrust approval in Europe and the UK. The UK Competition and Markets Authority also obliged dead Facebook intends to sell Giphy, the largest supplier of animated images for social networks, in 2022.

It’s also worth noting that the European Commission allowed Amazon to acquire MGM, and this is probably the closest comparison in business terms to this deal.

Paramount’s confidence stems from the continent’s track record of being tough on technology companies, with antitrust campaigns and sanctions targeting Meta, Microsoft, google, apple And Amazon in recent years. Paramount executives believe European Union regulators view Netflix similarly, based on recent conversations they have had with European officials, according to people familiar with the matter. Given the opportunity to prevent a major technology company from gaining more market power, Paramount executives believe Europe will seize the opportunity.

The European Union may also be more narrow in how it deals with cinema owners, as it views them as a basic necessity for culture and art. Both US and European film industry trade associations have publicly expressed their displeasure with the Netflix-Warner merger.

Sarandos confirmed this week that Warner Bros.’ films It will be released in theaters for 45 days, as always.

“We are working closely with WBD and regulatory authorities, including the US Department of Justice and the European Commission. We are confident that we will be able to secure all approvals,” Sarandos said Tuesday during Netflix’s earnings conference call. “When this transaction closes, we will benefit from having an extensive, world-class theatrical distribution business with more than $4 billion in global box office. We are excited to maintain and continue to strengthen this business.”

WBD’s board saw the coming together of two movie studios — Paramount and Warner — as a bigger regulatory hurdle than any presented by Netflix, according to people familiar with the matter. However, WBD’s lawyers have determined that both deals — Netflix-WBD and Paramount-WBD — are likely to win approval.

“The WBD Board of Directors has carefully considered the federal, state and international regulatory risks of both the Netflix and… [Paramount tender] “Presented with its regulatory advisors. WBD’s board of directors believes that each transaction is capable of obtaining the necessary U.S. and foreign regulatory approvals and that any difference between the levels of regulatory risk involved is not material,” WBD said in a December company filing.

On the issue of movie theaters, a Warner source told me that WBD is already looking at Paramount as a potential bigger problem than Netflix. That’s because WBD’s board and executives aren’t sure Paramount will have the money to produce 30 or more films a year (Paramount CEO David Ellison’s promise) while paying off billions of dollars in debt and targeting cost savings of $6 billion.

That’s why the structure of the Paramount deal is so important to WBD. To create a blue-chip deal for WBD, Larry Ellison, David’s father and one of the world’s richest men, would need to put more money into the stock to lower the combined company’s leverage ratio. The Board has no confidence in Paramount’s ability to realize its synergies while achieving its aggressive theatrical targets and moving forward with a leverage ratio of more than 7 times estimated 2026 EBITDA.

This week, Netflix changed its offering of WBD originals from mostly cash to all cash. Streamlining the bid allows WBD to move its shareholder meeting to approve Netflix’s bid earlier — perhaps as early as March, according to a person familiar with the matter.

Paramount is still considering whether to raise its offer or change its capital structure to re-engage WBD’s board, according to people familiar with the matter. It can also not do anything and wait to see whether it is right for regulators – whether European or American – to block the Netflix deal.

With so much attention paid to the importance of live sports in the television industry, it is unusual to view it as merely an afterthought. Paramount executives have argued that Discovery Global’s value should be zero based on its high leverage ratio and early valuation of Versant, the parent company of CNBC, whose trading has fallen about 30% since its debut on the public markets this month.

In a company filing released Tuesday, WBD argued that Discovery Global should be worth between $1.33 per share and $6.86 per share, depending on estimates.