WBD, Paramount’s regulatory path may be easier than tying up Netflix

After one day Paramount Skydance He emerged as the winner to take charge of the media giant Warner Bros. DiscoveryQuestions are growing about the companies’ regulatory path forward.

WBD’s board of directors said Thursday that Paramount’s revised offer of $31 per share was better than the current offer from NetflixWhich prompted the broadcaster to announce that it was withdrawing from the deal entirely and making way for Paramount.

Paramount’s higher bid – from $30 per share – was the latest in a series of moves it has made after it launched a hostile bid late last year to buy WBD. It initially lost the bidding war to Netflix, which offered $27.75 per share.

Paramount’s latest offer also included a breakup fee of $7 billion if the deal did not receive regulatory approval. According to Friday’s filing, it has already paid the $2.8 billion breakup fee that WBD owes Netflix if the deal falls through.

But media industry experts said the Paramount deal is likely to be subject to more government scrutiny than it was 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 high offer.

Although Netflix executives said they were “very confident” their deal would win approval, the merger would have combined two of the top streaming services — Netflix and Paramount+ — and would have raised prices for consumers and reduced 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 in it. He walked back those comments earlier this month, saying the deal would be at the Justice Department’s sole discretion.

Although the size of the combined entity of Netflix and WBD was one of the biggest antitrust hurdles the companies face, the issue could still be raised in Paramount’s favor.

Paramount and WBD both have sprawling portfolios of TV networks, with Paramount+ reaching 78.9 million subscribers, according to its latest earnings report, and HBO Max having 131.6 million subscribers through the end of 2025.

Paramount executives argued that one positive of their offer was that the deal with the media company would receive less government scrutiny. Paramount Skydance CEO David Ellison’s father oracle Co-founder Larry Ellison is known to have close ties with President Donald Trump.

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

However, the proposed Paramount deal has been criticized for potentially being financed by Saudi Arabia’s sovereign wealth funds. Abu Dhabi, United Arab Emirates; And Qatar. The company had previously said that those entities had agreed to waive all governance rights, including representation on the board of directors.

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

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

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

In a note on Friday, analysts said Paramount’s regulatory path forward is “significantly easier” than Netflix’s, though it won’t be a “quick cake.”

“Of course, there are new challenges in this deal regarding news, cable networks, international linear networks, etc., but we still feel the WBD/PSKY deal is more palatable across the board,” the analysts wrote. “Especially after the reaction to the WBD/NFLX agreement, we believe that PSKY’s political position with the current US administration is much stronger than that of Netflix.”

Analysts noted that questions remain about how a competitive market for companies is defined by the Department of Justice, and speculated that Netflix likely decided not to match Paramount’s superior bid because of what was “likely to be a brutal regulatory review.”

A Friday note by Morningstar analysts echoed these thoughts. Analysts said the move was appropriate for both Netflix and Paramount because they believed Netflix was unnecessarily overpaying for streaming and WBD Studios.

Notably, Paramount aimed to purchase all of WBD, including 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 felt that with the greater likelihood of rapid regulatory approval and the uncertainty surrounding the value and risks of the network business they would have retained, the best offer would have been $30 cash,” the analysts wrote.

Analysts added that they do not expect Paramount to face any regulatory issues during the approval process.

Paramount’s timing to make the offer was likely strategic, said Joseph Kalminowitz, an assistant professor of finance at the University of Rochester’s Simon School of Business.

“Not only did David Ellison outperform the Hollywood board, he timed the regulatory cycle perfectly,” Kalminowitz said. “The ‘big is bad’ populist philosophy is over, and the deal-friendly establishment is back in the making.”

However, Parin Knadjian, a partner at consulting firm EisnerAmper, said Paramount’s regulatory path forward remains delicate and not a done deal. While concerns about the Netflix-WBD deal have largely focused on library content, the Paramount-WBD deal is much more of a “horizontal consolidation” effort between cable TV, sports, streaming and news, he said.

“I think the biggest thing we will focus on is concentrating intellectual property under one roof,” Knadjian told CNBC. “What power does this new entity give in terms of the ability to charge greater fees?”

Paramount will also face political concerns, not just from state and federal politicians, but also between CNN and CBS combined under one roof, as well as concerns about blockbuster franchises like “Star Trek” and “Harry Potter,” Knadjian said.

Ultimately, approval of the deal will determine what concessions the two companies will have to make in order to allay any concerns about a potential media monopoly.

“Regulatory pressure, political pressure, these are the things that will definitely delay the deal and make it more complicated, and I think it will be necessary to make significant concessions in order for it to be implemented.

There are a lot of factors to this. “It’s much more complex than many other deals we’ve seen in the past,” Knadjian said.

— CNBC’s Lillian Rizzo contributed to this report.