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You know, you wait five more minutes and there's going to be a new headline here to paramount S Guidance versus Netflix for Warner Brothers. But we know that this will be a deal that takes a long time to resolve.
You know, there are differences.
You know, the Paramount deal is all cash and it is for the entire company. So those two things make it much much cleaner than the Netflix one, which includes twenty seven to seventy five and cash plus four dollars per share in Netflix stock, which has historically been a great thing to own. But it's contingent upon the separation of the Warner brother separation of its cable networks, which was a plan all law banned all along, and they've
already done a lot of work on it. And then so the value, the value total value seems pretty darn similar. It's just probably going to come down to who has a cleaner path to approval, and you know, you could do that math we talked to generally and it's that math is pretty darn straightforward. But now we have the added uncertainty which we historically had not had an M and a of you know, this is becoming politicized, you know.
Absolutely, because so we'll see Paramount Skuideance controlled by David Ellison, son of Larry Ellison. Ellison's have a very good relationship with President Trump, with the White House, and so they have made the argument implicitly or explicitly that this deal has the President's blessing, so therefore it will go through
more easily. Whereas we know that there's a lot of concern here about Netflix and it's bid for Warner Brothers dis great assets, not even the entire company here, and it all depends on how you define the streaming market, whether it includes YouTube or not.
So there's a lot here to get through.
Let's bring in Chris Paul Mary Bloomberg News Senior editor and Entertainment team leader on this deal. Chris, just give us a sense of what people in LA are saying, because most of these businesses take place in LA. Maybe not as much as they once did, and I'm curious to get a sense of how the industry is thinking about it.
I can tell you I was having dinner Saturday night at a time restaurant with the family, and my daughter's friend who's seventeen.
She goes, Netflix is buying Water Brothers.
I mean, this is just one of those things that just is shocking to everybody, but particularly to people that work in Hollywood.
It's been a really tough few years.
We've seen, you know, so much consolidation in the industry already, and job losses and movies and TVs shows being shot overseas and strikes and just the you know, the promise of another big merger like this. It's just, you know, people are really unhappy and in shock.
Chris Surah feeling it seems like if Paramount were to acquire Warner Brothers this discovery, there will be more overlap therefore more jobs at risk.
Is that the Is that the correct way to think about it.
Yeah, although you know they both acquires in Paramount and one of Brothers, they're trying to downplay, you know, the job loss as part of it. Netflix did say they looked at two to three billion dollars in annual savings. Much of that basically in overhead, you know, redundant jobs. But they were each trying to make the case that their merger would be a little bit less worse.
I guess you could say.
Just a quick note here, we have a correction to make. The Bureau of Labor Statistics will now publish the October and November PPI data together in January. I mean, the net effect is at the end of the day, Paul, All this data will come out after the fed's meeting this Wednesday.
Hey, Chris Paramount owns the Paramount movie in television studio. Warner Brothers are It's the Warner Brothers studio, is there, right? Can you put those two things together there? From a regulatory perspective.
Well, what they're doing is they both said both Paramount and Netflix have said they want to kind of maintain the creative executives is working separately at Warner Brothers. Warner Brothers has had a phenomenal TV business. One of the issues for Netflix is that historically Netflix has produced just
stuff for Netflix. But they have said they, you know, will continue the policy of Warner Brothers making shows for other people, you know, and they do, you know, have had a huge track record of that historically, so that's one of the things. Paramount also has said it would keep the Warner Brothers creative team together.
I'm not sure I believe that I would argue just from my own perspective, Chris, I'm I wonder what the folks in la are thinking. This is kind of a more of a must have for Paramount sky Dance versus Netflix. It's nice to have. Do you think that's accurate?
Yeah, I you know, I think if you just look at the public commentence from the two Netflix co CEOs, you know, Greg Peters was initially kind of dismissive of media mergers and was really paring cold water on this idea.
So I think that the idea that Netflix is.
That all in uh is, you know, is definitely a legitimate one. Uh, you know, Paramount, I think, you know, Michael Maffat Nathanson put out of you know something over the weekend saying, and I think this is true. Netflix has been the winner historically, and so if you want to find a home, best home for your you know, outstanding intellectual property, Batman, Harry Potter, Game of Thrones, on and on, you know, they're the ones that are going to get it all around the globe and invested in
all that. Putting two struggling companies together is it raises more issues. It's it's everyone always sort of seems to suggest that and almost any industry, but it doesn't always translate into outperformance.
Chris, this deal, no matter who wins out, Netflix or Paramounts guidance will take a while to resolve. There's going to be legal challenges there. It's gonna be anti trust regulators looking into it. What does that mean that long lead time mean for Warner Brothers is ability to just do business and be the best performing studio it can be.
In the meantime, it hurts it.
I mean David's ask on footoo a note last week the CEO of Warner Brothers saying, everybody just focused on your work and listen to your business leader.
This isn't gonna This is.
Going to take a while, but you don't even have to look very far or very long to find out. If you remember, you know, the challenges AT and T had when it bulable Warner Brothers a few years ago. There was an extended there was a lawsuit by the Justice Department really extended time to.
Close that deal.
Uh.
You know, many people believe that it held the company back in terms of you know, launching its own streaming service and you know, investing in the business. You know, I I don't see Warner Brothers core business helped by an extended regulatory review that really either bitter Paramount or Netflix would face.
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All Right, the Warner Brothers Discovery deal just got a little bit hotter here today we have an over the top hostile bid from Paramount, sky Skydance, whatever they're called these days.
That is for the entirety of the company. This is going to come down to regulatory hurdles. That's going to be one of the key key issues.
So for that return to generation covers all the antitrust stuff here for Bloomberg Intelligence, Jen, does one potential buyer Paramount, sky Dance or Netflix, does one have a clearer path to regulatory approval.
I think absolutely. I think Paramount has a far clearer path to approval. I mean, if you just think about them in terms of the streaming overlap, and when I talk about streaming, I am talking about a narrow market for just streaming services and not a broader market that might include YouTube. They are much smaller than Netflix, and so when you combine HBO Max with Paramount Plus versus combining HBO Max with Netflix, it creates far less of
a problem. You know, and looking across at the creation of original scripted content, let's say that's a market that the Department of Justice looks at. Again, the combination is smaller than the combination of Netflix with Warner. And then you have the added cable channels. So Paramount has cable channels, Warner has cable channels. Netflix would not be buying those. So that is an issue that arises in the Paramount situation and not Netflix. But I do think if there's
any problem there, that's easily resolvable. So in my mind, Paramount's the better buyer from an antitrust perspective.
I'm curious about the termination fees involved in this deal. Netflix says that will pay a termination fee of five billion dollars of the deal fails. That seems really large. Paramount Skuidances offer includes a five billion dollar termination fee. Just talk a little bit about the amounts involved there and what the fact that well, at least to me, it seems pretty large, says about what each side thinks of the possibility of this going through or not.
Relatively speaking, it's a very large termination fee. You know, you usually see these as two percent or three percent of the purchase price, and Warners had to do that when they negotiated this. I mean, there is a high risk right that a Netflix deal would ultimately not get done, that they could get sued in court, that they could lose in court, it would break up.
So they need to be.
Protected because their business is just frozen for two years practically, and it does impact a seller's business right to kind of be in limbo that long. And that's what the termination fee is meant to do. Now, I think they have far less of a problem with Paramount, but you never know, and so I think to protect themselves, Warner would have wanted to work that in and Paramount wants to give that kind of insurance in case there's some problem there too.
Now, okay, so what are the next step?
So here, if I'm the board of Warner Brothers Discoverer, do I have to respond to this thing?
Well, Paramount it's a hostile takeover, so they're going against the board's wishes.
Basically, we know what the board wants.
The board seems to prefer Netflix, even with all the anti trust risk it brings. So now it's just going to depend on what happens here as they go forward and they solicit the shareholders. I think the deal that would get done more quickly and has the surest path would be the Paramount deal. So if Warner's interested in getting something closed within the next year, I think Paramount would be the company that they'd go with. I don't see them getting a Netflix deal closed in the next year.
Let's talk about the politics part of this. Axios is reporting that Jared Kushner is helping to finance Paramount's bid for Warner Brothers Discovery, and that Axios is citing a regulatory filing on this Kushner financing bid. Does that put
it in a better position? Because Larry Ellison has a good relationship with President Trump, Jared kush Or, the president's son in law, is involved here, even as Larry Ellison tells other media that if he feels that the deal was inherently biased towards Netflix.
Well, I would say if things were conventionally done, then it shouldn't. It should be all about anti trust. It should be the analysis the economists and their assessment of the markets and the impact on the markets. But in today's day and age, there is an impact from politics, and the administration does seem to kind of micromanage these decisions, and so I think politics is a significant factor here,
right next to anti trust. And from what you just told me and what we've read, it seems paramounts the favorite bidder by this administration as well.
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One thing we didn't get to is the credit market. And of course we've seen yields, we've seen spreads really really tight, even as we've seen a lot more supply come into the market because of all the spending on AI, and there's going to be even more spending in twenty
twenty six. So let's bring in right now Steven Flynn, he's a senior credit analyst at Bloomberg Intelligence, and Stephen, we want to really dig into Netflix because as part of this bid for Warner Brothers Discovery, it's going to be getting a fifty nine billion dollar bridge loan, the biggest investment grade bridge loan in a while, and of course that means eventually that will be replaced by corporate debt as well. How are you thinking about what kind of market impact that will have.
Well, first of all, it's sort of that Netflix is a very strong credit So Netflix has a significant market cap. It's you know, four hundred and twenty five billion dollars or so. The company is growing, revenue, growing evada, growing free cash flow. It's net leverage ratio is very modest, talking zero point four turns of leverage.
A company generates a ton of free cash flow.
So Netflix is a very strong credits rted A three A, so they have the ability to borrow. So within that fifty billion dollars that they have as acquisition debt. There's been a reporter that's twenty five billion dollars will likely be bonds, and there remain will probably be a combination of term loans and maybe some other borrowing. And while twenty five billion sounds like a lot, if we think about Netflix bonds in the market right now, they're relatively scarce.
Right So if Netflix is part of communications, you think about borrowers like a teen T Verise and Comcast T Mobile. Those companies have huge debt loads and are large parts of the investment grade corporate bond indict. So Netflix is relatively small, So I think that there could be a lot of interest in Netflix bonds, So I don't think it's a problem at all.
And then the news of the day here Paramount coming back over the top of the hostile bid Warner Brothers Discovery. They're talking about fifty four billion dollars of debt commitments from Bank of America, City and Apollo. So again, your market is going to have a lot to say about how this deal gets done, isn't it.
Yeah, this is a completely different story, right So Netflix, of sorry, paramounts guiddances on the edge of investment grade. So the investment grade by excuse me, by Moody's and Fitch, High yield by S and P. If you you know, they're talking about the combined company could have about one hundred billion dollars a debt.
So if we look at the debt loads at.
Both paramounts, Guidance and Warner Brothers, you're talking about an incremental fifty billion dollars.
You just they have a you know, fifty four billion dollar commitment.
You're talking about pro form net leverage over five times, and that's including synergies, right, so that's going to be much tougher. You're talking probably a good chunk of that will be high yield, and that is a lot for the highield market. Now, the highal markets very strong. Issuance is up, yields are down. I think you know it's the highal market is very favorable. But this would probably
be the biggest name in high yald. The biggest name highyield right now is Charter, So Charter unsecured bonds are the biggest name. There's about twenty five billion dollars market value for Charter bonds in the Bloomberg Highyield in it depending on how they set it up but this could easily become you know, the biggest name or close to it, So that makes it much tougher.
Now we have to see all the details.
But so if I'm a shareholder Warner Brothers Discovery a the regulatory aspect which Jenery just walked us through.
But now I've got the sitting there.
If I'm an equity shoulder, do I want to be sitting there with a balance sheet of five times leverage?
Well, if you're a Warner brother shareholder, you're getting cash, right, so you could only But if you're a paramount shaholder, yes, you have to be concerned that the pro form of company will have a significant amount of leverage.
And that has a big name in high yield.
But you do you know they also have big backers behind them, right between the Allison family and Redbird Capital.
Pramon scot Dance stock is up five percent today.
Yeah, well, I mean, but this is not going to end anytime soon. This is going to drag on.
So Stephen, media companies being heavily indebted, what do we know from about the appeal of this sector to investors? I mean, I think about Warner Brothers Discovery when it came into being. It took on a lot of David Zasov spent years trying to pair that down.
Yeah, and he was unsuccessful.
Right, the company was junked and they ended up doing a massive tender offer where they put in a lot of secure debt ahead of the existing bonds and then use that to tender for existing bonds at a discount to par So bondholders really got hurt then, and then the company, you know, was junked.
So it's been tough.
It's you know, when you think about communications in general, people feel a lot more comfort. We're lending to more traditional communications companies like telecom cable, you have hard assets, it's a little bit easier to lend to.
It is a little bit tougher in media. So this would be a large name for media.
What's paramounts?
Does Paramount have a view like does a marketplace have a view on powamount?
Well, Paramount, it's not a very large name and it is on the cusp of IG. It trades very wide for IG, but that's because it's on the cusp and there's fears of a certain deal like this. Now there's two sides, right, you have the positive of the Elson family and Redbird coming in and saying, hey, there's support there. You know, I know we have somebody that's that backing us. Things can't get too bad. And the flip side, you know, the business is challenged, and you know there is the risk of.
High yield I mean back of my date for this, this kind of deal and your higeld I mean high yield market. Five phone calls, I would I would get a sense of whether.
The deal could get done. Is it still like that today?
Yeah?
Sure, if you call the right people, that's right.
And I knew the people to call, and they would say, I don't think so, Paul, I don't think we can get this.
You know.
Well, speaking of the right people, Jared Kushner is part of this paramount hostile deal bid for Warner Brother's Discovery through Affinity, the firm that he runs. So there's all kinds of political considerations as well.
How do you anticipate.
Warner Brother's Discovery bonds to trade in the meantime, I mean, what does that look like?
Well, they've been very volatile, right, So if you go back a couple of months ago when they got jumped in, there was the big tenor offer of the bonds were crushed, they were chart trading at large discounts to par. Then they've had a nice run over the last couple of months with all the speculation of being bought out. Now the Netflick Flicks deal happened and the existing bonds appear to be left behind with global networks business which is
somewhat deteriorating. So the mons traded off a little bit on Friday and then now coming in with having Ellison in Redbord behind you, that's giving a little bit more of a left but they're likely to remain very volatile.
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IBM buying conflent for nine point three billion dollars in cash or eleven billion dollars if you include debt on our Agrana is Bloomberg Intelligence's technology analysts and he joins us now, So on rag, what can you tell us about how this fits in with IBM's ambitions, in particular it's AI ambitions, which it's really been repositioning as business around.
ViBe's done a very good job since the acquisition of red Hat. Not only did they pivot and move towards software, which is a much higher margin business, they actually have margin improvement because the gross margin of those businesses is very high. Since then, they've bought a number of companies Harshi Corp, Appto and now Confluent. The big thing what we want to think about over here is enterprises do
not always go with either AWS or Microsoft. They do, you know, look at open source as a way of building their infrastructure. Confluent specializes in open source streaming data platform, which is when you are looking at real time data, whether it is you know, something that comes from a telemetric device or even transactions that are happening at a retailer or a bank, you can ingest that data directly
into your system and then make sense out of it. Now, that's going to be helpful as enterprises infuse more AI into their application. So strategically, smart move financially also smart.
Red headline crossing the Bloomberg terminal the BLS to not publish October PPI data, which I.
Believe makes sense given that if I recall correctly, the BILS already told us that it's not publishing October jobs or CPI data either, right, So that's kind.
Of what we heard from a lot of it at Connors. We'll talk to Mike McKey about that. Yes, absolutely, Yeah, that's coming up all right. IBM, this is as a kid.
IBM was technology, that was the impitomy of tech technology. Then the Internet came along and they kind of missed it, so you didn't think about them a whole lot. Now, if you put up a stock chart, over the last five years, the S ANDP has compounded at about fifteen percent per year. IBM over that timeframe twenty six percent per year ANAG what's the what is the turnaround of this aircraft carry over the last five years? Now?
As I said, I think it is the acquisition of red Hot. I think the CEO has done a very good job of blending that particular you could say, operations within their services platform, because when you think about the IBM prior to that, it was very services heavy. That's a business that has forty fifty percent gross margin, not
as profitable as software businesses. By being open, by going out and buying software businesses, their financial profile has changed, their cash flow has changed, and I think it's more stable in nature. They're still not at a point that their sales growth is going to be in double digits, but they are inching towards their target and it may be you know, two to three years before they get there.
So, Honor rog what's interesting about this particular acquisition is IBM is definitely making inroads or greater inroads into AI, but this is not a data center driven acquisition.
What do you think that means in terms of the next.
Stage of M and A that we're going to hear from the tech industry when it comes to taking advantage of opportunities in AI, but not necessarily buying AI data centers.
You see, everybody has their own strategy what they are focusing on. IBM luckily, and it's good for them that they don't want to be in that, you know, a capital intensive heavy data center business. Because this is a company that generates let's say fourteen fifteen billion in free cash flow. They can't go out and buy another day expand into a data center space where the capital investments
is multiples of that. They are doing the smart thing of buying software companies that are not capital intensive heavy. When you are going out and creating a new application, you know the raw material You need the raw materials to create or embed that. And that's where they are focused on and I think for what they do, it's it's a very smart place to be in.
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