How high will Netflix go? That used to be a question discussed all over Wall Street regarding the streaming giant’s stock price. But as of late, it has been the focus of a debate about whether the global streamer was ready to outbid David Ellison’s Paramount for Warner Bros. Discovery, should the latter’s board deem Paramount’s sweetened takeover bid as superior to Netflix’s most recent offer.
Wall Street analysts agree that the deep-pocketed Netflix could handily trump Paramount without creating financial headaches for its management team. Instead, the real question is whether it is willing to do so, and what the stock fallout beyond a recent pullback related to deal-related and other investor concerns would look like, along with the impact on Netflix management’s strategic narrative for what has so far been a pure-play streamer.
Netflix’s stock had closed at $103.22 on Dec. 4, the day before the initial WBD-Netflix deal announcement, falling 24 percent to $78.04 as of the close of Tuesday.
WBD is reviewing the latest Paramount offer, while Netflix’s co-CEO Ted Sarandos has signaled both financial discipline and optimism about getting a deal done and over the regulatory finish line. So where do Wall Street experts stand on the bidding war right now?
Bernstein analyst Laurent Yoon characterized the state of play this way: “If the [Paramount] offer is high enough to nudge a response from Netflix – and the revised terms (e.g. financing guarantees) meet expectations, or the offer is rich enough for WBD to assume some risks – the next logical question is: What is Netflix’s next move, and how high is its ceiling?” He added: “Netflix has the balance sheet capacity and free cash flow growth to push well into the $30s if it chooses to, but that doesn’t mean it should.”
The Bernstein expert cited three angles to consider: debt leverage, stock price, and the CEO factor.
The first is really a non-issue, according to Yoon: “Netflix’s balance sheet and expected future cash flow can support a (much) higher bid,” he wrote. “A price north of $30 per share would push Netflix leverage into the mid-3x range on 2027 EBITDA but would fall below 3x on 2028 EBITDA – the metric we believe matters more, given the likely timing of deal closing if it were to proceed. We do not believe the transaction would jeopardize Netflix’s investment-grade rating, but even if it did, we see limited practical impact as Netflix has no near-term need to issue new debt, and leverage would quickly normalize, supported by growing EBITDA and free cash flow.”
In case you are wondering what the mention of Netflix’s investment-grade debt rating means, the key thing to know is that this indicates a low default risk, allowing the company to borrow money at lower interest rates and with more favorable terms compared to companies with a so-called “junk” rating.
Yoon similarly sees no real issues relating to the stock price. “Perhaps the more relevant ceiling is where the deal becomes dilutive to Netflix shares,” he highlighted. “Assuming $1.5 billion of synergies in 2028 (50 percent of the $2-3 billion operating expense savings Netflix has proposed), the company could justify a bid well into the $30s. Additional synergies would only expand that headroom, providing further equity upside in the long run.”
But what about the CEO factor? “Ultimately, decisions are made by people, not spreadsheets. Numbers matter, but they vary, driven by information asymmetry and what management chooses to believe,” Yoon emphasized. “While the ‘math’ supports Netflix going materially higher, that does not mean it should. Netflix has built a reputation for disciplined capital allocation – a point management has emphasized repeatedly.”
Concluded the Bernstein analyst: “If the price tag no longer makes sense for Netflix, and if this deal is likely to hinder Paramount-WBD to invest aggressively in growth near-term, walking away remains a perfectly rational outcome. Netflix can raise its offer beyond Paramount’s latest $31 per share if necessary and still create value for shareholders (if multiple is not penalized further from the deal). Netflix’s ability to bid higher depends on its certainty of achieving synergies.”
MoffettNathanson analyst Robert Fishman has been discussing how much “discipline” Netflix will show in the hunt for WBD. “Analyzing the deal math for Netflix, our base case scenario sees no [financial] accretion beyond $30 per share,” he wrote in a recent report focused on that topic. In fact, “beyond $30 per share and using our current pro forma forecasts, the deal would start to be modestly dilutive to 2028 earnings per share,” he highlighted. “Any increase in the bid is likely to weigh further on Netflix’s already substantially depressed [stock market] valuation.”
However, that recently depressed stock price may help investors to some degree, Fishman concluded. His takeaway: “With Netflix’s stock at current depressed levels, investors should win either way. We see longer-term benefits of owning Warner Bros.’ assets not properly reflected at these levels. But if Netflix walked away from the deal, the company’s core fundamental drivers of subscriber and advertising growth plus pricing power should rebuild investor confidence that WBD was truly ‘nice to have’ and not a ‘must have’.”
Richard Greenfield, analyst at LightShed Partners, suggested Paramount could well still walk away with the WBD business if it practices patience. “Given our belief that Netflix would move at least 10 percent higher, the only way for Paramount to be the winning bid is to significantly increase the dollar value of its bid,” he wrote in a Feb. 17 report before Paramount submitted its sweetened offer. “In our view, $30 is already likely overpaying for WBD,” he warned in the report entitled “Maverick, Don’t Do It: Ellison’s Warner Bros. Gamble Is a Mission He Should Abandon (For Now…).”
Greenfield’s suggestion: “Paramount should simply allow Netflix to be the winning bidder and wait six months for Discovery Global to spin out from WBD. Then Paramount will be able to acquire Discovery Global for a dramatically lower price … assuming DG trades as poorly as Paramount believes it will. While you might question why Paramount would still buy the DG assets, we continue to believe it needs them to help take costs out of Paramount’s troubled cable network portfolio and leverage the combined linear cable network cash flows to delever. Remember, for all the challenges facing Discovery Global’s cable networks, they are far better positioned than Paramount’s cable networks.”
And the rest of WBD could return to the auction block if regulators indeed block Netflix’s acquisition. “Paramount appears 100 percent confident that the WBD/Netflix deal will be blocked by regulators in the U.S. and in every major territory around the world,” the LightShed analyst wrote. “Given Ellison’s repeated public statements that his current plan for Paramount following the Skydance transaction does not require a WBD acquisition, why not simply wait for the Netflix deal to fail? If Paramount walks away today, it will have a far stronger balance sheet, be able to invest aggressively in content, be able to focus on executing its existing plan for Skydance/Paramount, buy Discovery Global for far less than its implied value inside WBD today, and then be able to acquire the Warner Bros. studio and HBO assets for far less once the Netflix deal is abandoned due to regulatory problems.”