That was a good way to make a few billion dollars. Netflix (NFLX) has scored a $2.8B breakup fee after walking away from a deal to acquire Warner Bros. (WBD), with Paramount Skydance (PSKY) serving up an offer the former studio didn’t want to outbid. The advance from Paramount (PSKY) is valued at $111B vs. the $82.7B that Netflix (NFLX) made to reach the initial deal—translating into a staggering $28.3B spread between both their proposals.
The reaction: The loser is winning on Wall Street, with shares of Netflix (NFLX) surging 7% premarket, though the winner is logging even larger gains. Paramount Skydance (PSKY), which has agreed to cover the breakup fee, is up 9% in early trade as investors digest what the impact will be for both companies. Note that even after factoring in the big gains from this morning, shares of NFLX are still down 12% since it first agreed to the deal with Warner Bros. (WBD), while Paramount Skydance (PSKY) is 18% lower. Their stocks are also down by more than a third since talks got serious in October and November, meaning they both have significant ground to recover.
“We’ve always been disciplined, and at the price required to match Paramount Skydance’s latest offer, the deal is no longer financially attractive,” Netflix (NFLX) said in a statement. “This transaction was always a ‘nice to have’ at the right price, not a ‘must have’ at any price.” Netflix (NFLX) shareholders have also been wary about the theatrical Hollywood deal, worrying that it could compromise the company’s current internet business model, as well as the massive new debt load it would incur to finance the merger to the tune of more than $50B.
In comparison: David Ellison’s Paramount Skydance (PSKY) sees things very differently. The studio is hungry to expand after Skydance Media and Paramount Global closed their merger last summer despite losses that continue to pile up. It sees Warner Bros. (WBD) as the key to its turnaround strategy, staying on top of the industry with a gigantic content library and franchises, and creating a must-have subscription service for consumers. In terms of debt concerns, Larry Ellison, one of the world’s richest people, has personally backstopped much of the deal, giving him an outsized media influence with new stakes in CBS, Paramount, CNN, HBO, and TikTok (through Oracle’s (ORCL) cloud provider relationship).