Paramount Skydance enhances Warner Bros acquisition offer to compete with Netflix

Paramount Skydance upgraded its $30-per-share all-cash tender for Warner Bros. Discovery, adding a $0.25/ share quarterly "ticking fee" (≈$650m per quarter after Dec. 31, 2026), agreeing to cover WBD’s $2.8bn termination fee to Netflix and supporting $1.5bn of debt refinancing costs. Paramount says the bid is fully financed — $43.6bn in equity commitments from the Ellison Family and RedBird, $54bn in debt commitments from Bank of America, Citigroup and Apollo, plus a $43.3bn personal guarantee from Larry Ellison — and argues its offer provides greater immediacy and regulatory certainty versus Netflix’s $27.75/share proposal; PSKY, WBD and NFLX shares moved modestly on the news.

Analysis

Market structure: Paramount’s $30 all-cash amendment (vs Netflix $27.75 for studios/streaming) crystallizes a takeover premium that directly benefits WBD equity and bondholders short-term and pressures Netflix’s strategic optionality. Banks (BAC, C) and Apollo stand to earn underwriting/arrangement fees and face near-term credit exposure; PSKY equity (at ~$11) is likely to remain volatile given massive equity/debt commitments ($43.6B equity, $54B debt, $43.3B Ellison guarantee) and dilution/financing risk. The ticking fee ($0.25/share ≈ $650M/quarter) and covered $2.8B termination fee raise the economic cost of delay for Netflix and increase the probability of deal resolution within 3–9 months.

Risk assessment: Highest tail risks are regulatory blockage (DOJ/FTC challenging horizontal consolidation or vertical content distribution), a financing shortfall if credit spreads widen >200bps, or a bidding war driving price >$32–$33 that Paramount walks from. Immediate (days) risk = headline-driven volatility and option gamma; short-term (weeks–months) risk = HSR/antitrust scrutiny and lender repricing; long-term (years) risk = integration failure and cord-cutting accelerating linear decline. Hidden dependencies include Ellison’s personal guarantee concentration risk and reliance on bank/APollo commitments that could evaporate in a stressed credit draw.

Trade implications: Merger-arbitrage favors long WBD exposure sized to the spread to $30 with tight regulatory stop-losses; consider hedging market beta via a dollar-neutral short in NFLX or broad media ETF. Options are appropriate to define downside: buy-call spreads on WBD to cap premium vs outright equity; small tactical longs in BAC/C to capture underwriting fee flows but size <1% each. Catalysts to watch: HSR filing (next 30–60 days), formal regulatory second request (if issued, push timeline +3–6 months), any higher competing bid (>+$1.50) or material financing amendment.

Contrarian angles: Consensus may overestimate Paramount’s regulatory certainty—$43B+ leverage and combined market share in streaming/studios invite scrutiny; probability of a lower-compromise deal (asset carve-outs or higher breakup fees) is >30%. Market underprices the chance Netflix raises a targeted bid for studio assets or partners with PE; conversely PSKY’s guarantee could deter higher bids if perceived as brittle. Historical precedent (AT&T/Time Warner, Comcast/Disney bids) shows regulatory delay commonly compresses arbitrage spreads but rarely leaves acquiror paying full initial premium, so size positions accordingly.

Key Decisions for Investors

• Establish a 2–3% portfolio long position in WBD equity as merger-arbitrage exposure targeting capture of the $30 bid within 3–9 months; set stop-loss to reduce position by 50% if WBD trades below $26 or if DOJ/FTC issues a likely block opinion.
• Implement a dollar-neutral pair trade: long $1 of WBD and short $0.9 of NFLX (ratio to approximate beta offset) sized to 1–1.5% net exposure; rationale is to isolate takeover premium vs Netflix strategic setback, hold 3–6 months and trim if competing bid >$31 or Netflix announces alternative acquisition strategy.
• Buy WBD Jul 2026 $30/$35 call spreads (or similar expiry covering expected regulatory window) sized 0.5–1% of portfolio to cap downside while retaining upside to $30; exit on deal close or if a formal antitrust second request is announced (reduce by 50%).
• Take small tactical longs in BAC and C (0.5–1% each) to capture underwriting/arrangement fee recognition and potential positive re-rate if deal probability rises; liquidate within 2 quarters or if senior bank CDS widen >30bps which signals broader credit stress.
• Do not increase overall exposure until HSR filing outcome is clear: if regulators issue a second request within 30–60 days, reduce WBD gross exposure by 40% and shift remainder into defined-loss option structures (spreads/puts) until regulatory timeline clarifies.