Exclusive | Paramount Skydance has a ‘plan B’ if Netflix wins auction for Warner Bros. Discovery: sources

Paramount Skydance (backed by the Ellisons) has a contingency 'Plan B' if Netflix wins the auction for Warner Bros. Discovery; Netflix is reported to have a majority-cash proposal suspected near $30/share while the Ellisons' current offer is around $25/share, with deal talk valuing WBD as high as ~$70 billion. WBD’s board views the race as a toss-up, but DOJ and European antitrust risks for a Netflix–HBO Max combination are driving strategic positioning — the Ellisons are prepared to mount a shareholder-directed/hostile campaign arguing Netflix’s deal would be blocked — and Comcast remains a second-round bidder that may need to borrow to compete.

Analysis

Market structure: A Netflix win would concentrate global streaming scale (incremental pricing/ARPU leverage ~3–7% over 12–24 months) but faces material regulatory friction; a Paramount Skydance/Comcast outcome preserves more competitive distribution and faster regulatory clearance. Direct winners short-term: WBD shareholders (takeover premium), Ellison/Paramount/Comcast if they secure assets; losers: pure-play streaming peers that lose licensing arbitrage and NFLX if blocked. Cross-asset: expect WBD equity volatility to spike + implied vol 30–60%, WBD credit spreads widen on litigation risk; small upward pressure on USD if deal financed in cash, commodities largely immaterial.

Risk assessment: Tail risks include DOJ/DOJ EU blocking Netflix-WBD leading to >24-month litigation and a >20–35% adverse re-rate for NFLX and WBD depending on outcome, or a late competing bid pushing price >$30/sh. Near-term (days): board decision and shareholder outreach; short-term (30–90 days): pre-merger filings and regulatory signals; long-term (12–24 months): litigation outcome and integration execution. Hidden dependencies: availability of debt financing if Comcast participates, shareholder activism by Ellison, and EU regulator timelines that can extend to 9+ months. Key catalysts: WBD board announcement (days), DOJ second request or HSR filing (weeks), EU antitrust statements (30–90 days).

Trade implications: Direct: tactical long WBD equity below $26.50 for 6–12 months or arbitrage if spread to final bid >$1.50; avoid concentrated long NFLX equity until DOJ clarity. Pair: establish long WBD / short NFLX (capital-neutral delta) sized 1–2% portfolio to capture regulatory disappointment asymmetry. Options: buy NFLX 12-month puts 25% OTM (0.5–1% portfolio risk) to hedge DOJ-block scenario; sell covered calls on WBD to enhance yield if acquired above $25. Entry/exit: act within 7–30 days around board decision and exit or rebalance after DOJ pre-merger filing.

Contrarian angles: Consensus underestimates Ellison’s willingness to pursue a hostile shareholder campaign and to wait out litigation — this keeps WBD as a binary asset with a hard floor near the highest credible cash offer (~$25–$26) if financing is secured. Markets may be overpricing certainty of Netflix’s victory; historical parallel: AT&T/Time Warner showed DOJ suits can take >18 months and not always prevent deals, producing 20–40% interim dislocations. Unintended consequence: prolonged uncertainty will impair HBO Max/NFLX subscriber growth by 3–8% over 12–18 months, creating buying opportunities in creative/production names if studios consolidate.

Key Decisions for Investors

• Establish a 2–3% long position in WBD if the share price falls to or below $26.50, with a 20% stop-loss and plan to hold 6–12 months pending DOJ/EU outcomes — expected upside if Ellison offer acts as floor or if Netflix fails.
• Purchase NFLX 12-month puts ~25% out-of-the-money sized to 0.5–1.0% of portfolio notional to hedge regulatory-block risk; target premium <3% of notional where possible and trim on any 30% rally in implied vol.
• Implement a pair trade: long WBD / short NFLX, equal dollar exposure totaling 1–2% of portfolio to capture asymmetric regulatory risk; rebalance after WBD board decision or DOJ pre-merger filing (7–90 day window).
• Overweight studio/production names (small-cap content suppliers) by 1–2% of portfolio for 12–24 months expecting consolidation tailwinds; underweight CMCSA by 1% if Comcast is forced to borrow heavily and faces political/regulatory friction in next 3–6 months.