Warner Bros. Discovery Rejects Paramount Bid Amid Cable Value Debate

Warner Bros. Discovery (WBD) rejected an eighth acquisition bid from Paramount Skydance CEO David Ellison. WBD told shareholders that Netflix's offer of $27.75 per share for the studio and streaming business is a better deal than Paramount's $30 per share all-cash offer for the entire company. The rejection occurred on Wednesday.

Paramount argues its offer is superior partly due to the value of WBD's cable networks. This argument gained support this week following the rocky public market debut of Versant, a spinoff of Comcast's cable assets. Versant's stock dropped roughly 25% in its first three days of trading. This decline indicates a lack of investor appetite for cable TV assets, which could impact the valuation of WBD's networks. Ellison may use this data to convince WBD shareholders to reconsider the board's decision.

Warner Bros. Discovery rejected Paramount Skydance's latest bid on Wednesday. The offer was Paramount's eighth attempt to buy all of WBD's assets. WBD management informed shareholders and employees that Netflix's proposal is the superior option. Netflix has offered $27.75 per share in cash and stock to acquire WBD's studio and streaming operations. In contrast, Paramount offered $30 per share in all cash for the entire company, including its cable networks.

The difference in valuation centers on the worth of WBD's cable television assets. There is a $2.25 per share gap between the two bids. If the cable networks are worth $2.25 per share or more, Netflix's offer appears more attractive. If they are worth substantially less, Paramount's $30 per share offer for the whole business looks better. Ironically, this gives Paramount an incentive to argue that the cable assets are worth less, while Netflix has an incentive to praise assets it does not intend to buy.

WBD noted in its rejection letter that Paramount's bid includes added costs. These costs include a $2.8 billion breakup fee payable to Netflix if WBD changes course. Additionally, there is a $1.5 billion cost to lenders if WBD does not complete a debt exchange, and approximately $350 million in additional financing costs. WBD stated that this $4.7 billion total reduces Paramount's effective price by about $1.79 per share.

Paramount's argument regarding cable network value received an unexpected boost from the performance of Versant. Versant began trading on Monday as a spinoff of Comcast's cable assets, including CNBC and MS NOW (formerly MSNBC). In its first three days of trading, Versant lost about a quarter of its value. Shares fell to approximately $33.80 from a starting point of $45.17.

Analysts cite Versant as a comparison for valuing WBD's "Global Networks" division. Versant's market value is now under $5 billion, with an enterprise value of roughly $7.25 billion including $2.25 billion in net debt. The company projects $1.85 billion to $2 billion in EBITDA for 2026. This results in an EV/EBITDA ratio of about 3.8x, which is significantly lower than the multiples of many S&P 500 companies.

One factor potentially impacting the sell-off is that some large funds owning Comcast shares are forced to sell Versant stock because they cannot own the new entity. However, the low valuation suggests the market lacks appetite for cable TV assets. If WBD's Global Networks traded at the same 3.8x ratio, they would be worth only about $1.20 per share based on MoffettNathanson's EBITDA estimates. A person familiar with Paramount's thinking estimated the value even lower, at $0.56 per share.

Despite the data from Versant, the comparison is not perfect. Versant and WBD's Global Networks are not an apples-to-apples comparison. WBD's portfolio includes CNN and major live sports rights, such as the NHL, college football, and "March Madness" college basketball. Analysts view these assets as more valuable than Versant's. WBD also noted that its division includes the streaming service Discovery+, which "generates substantial revenue."

Analyst Rich Greenfield of Lightshed Partners stated that WBD's cable assets are far more valuable than Versant's. He expects WBD's Global Networks to be "sold and/or broken up after it spins out," which could unlock significant value. However, WBD's Global Networks is set to carry far more debt than Versant.

If Paramount cannot convince shareholders that its offer is less risky than Netflix's, David Ellison could raise his bid. Greenfield believes a bidding war could occur. He noted that there is still a path for Paramount to outbid Netflix, but it would require a substantial increase in the cash invested by the Ellison family and their financing partners.