Netflix investors cheer decision to drop Warner Bros. fight

By Christopher Palmeri, Bloomberg

Netflix Inc. just won by losing.

Shares of the streaming industry leader rose as much as 12% in New York Friday after the company announced it was dropping out of the fight to buy Warner Bros. Discovery Inc.

The decision prompted a sigh of relief from investors who worried that Netflix, a company that rewrote the rules of movies and TV, would end up overpaying billions of dollars to become another me-too Hollywood studio — even if that studio owned coveted film and TV franchises like Batman and Game of Thrones.

The Netflix announcement came shortly after Warner Bros.’ board announced that a new $111 billion takeover offer from Paramount Skydance Corp. had eclipsed the Hollywood giant’s previous deal to sell its studio and streaming business to Netflix for about $82.7 billion.

“We’ve always been disciplined, and at the price required to match Paramount Skydance’s latest offer, the deal is no longer financially attractive,” co-Chief Executive Officers Ted Sarandos and Greg Peters said in a statement. “So we are declining to match the Paramount Skydance bid.”

Netflix shareholders never liked the Warner Bros. deal. The stock lost about 40% of its value in the five months after the company’s interest in Warner Bros. first became public. Investors, already worried about future growth prospects at Netflix, thought the company was messing with the business model that had made it so successful, and taking on more than $50 billion in new debt to do it.

As part of that model, Netflix never made a big push to put its films in theaters, preferring only limited big-screen releases to qualify for awards. Facing an uproar from cinema chains and Hollywood insiders, Netflix said it would release Warner Bros. films in theaters for at least 45 days. It also agreed to sell Warner Bros. TV shows to other entertainment outlets. Netflix historically produced content only for its streaming customers.

As recently as October, co-CEO Peters was telling attendees at Bloomberg’s Screentime conference that investors should be skeptical of big media mergers, which don’t have a great track record.

“We come from a deep heritage of being builders rather than buyers,” Peters told attendees.

That made Netflix’s decision to bid for Warner Bros. all the more surprising. The stock has been a perennial winner for investors, logging just six down years since its initial public offering in 2002. It was trading at $91.85 Friday morning in New York.

Because Paramount topped its existing offer, Netflix will receive a $2.8 billion breakup fee, enough to make quite a few new movies and TV shows. The company said it will resume share repurchases.

“We believe those buybacks will be the main use of the freed-up dry powder,” Raymond James analysts wrote in a research note Thursday. “But now that the company has gotten a taste of the M&A landscape, we cannot rule out other options.”

Netflix could also invest more in sports rights and licensing agreements like one it did recently for Sony Group Corp.’s films, analysts at MoffettNathanson Research said.

Los Gatos, California-based Netflix plans to spend about $20 billion on programming this year. With more than 325 million subscribers and a market value of more than $385 billion, the company dwarfs its Hollywood competition, especially the struggling Paramount and Warner Bros.

Netflix was founded in 1997 by Silicon Valley veterans Reed Hastings and Marc Randolph as a mail-order DVD rental business. Two years later they introduced a monthly subscription that allowed consumers unlimited rentals for a flat monthly fee.

The company went public in May 2002, trading at just a few cents a share after adjustment for splits, and turned its first profit in 2003.

A turning point came in 2007, when Netflix launched its streaming service, called Watch Now, introducing a catalog of more than 1,000 films and popular TV shows including The Office. The company had 5.7 million subscribers at the time. The service was offered at no additional cost to its DVD-by-mail customers.

The company’s efforts to build a Netflix player that customers could use to stream movies and shows to their TV sets led to the creation of Roku Inc., the set-top box company.

As a threat to the old ways of doing business in Hollywood, Netflix had numerous dust-ups with studios. In 2010, the company agreed to hold off renting DVDs of new-release movies for four weeks after they went on sale in stores in a settlement with Warner Bros. Similar deals followed with Universal Pictures and 20th Century Fox.

Eventually Netflix reached licensing agreements with the studios, which were eager to generate revenue from the burgeoning streaming business. The company would make whole seasons of shows available for streaming, spurring consumers to watch for hours on end and leading observers to label it binge-watching.

One of Netflix’s biggest missteps came in 2011, when the company announced it would separate its mail-order and streaming operations into separate subscriptions, effectively raising prices by 60% and angering customers. A month later management reversed course.

That same year, Netflix branched into original programming with House of Cards, a political thriller featuring Kevin Spacey.

In later years, Hollywood studios began to question their decision to license their best movies and TV shows to Netflix. Walt Disney Co. famously cut its ties to Netflix in 2017, announcing in August of that year it would launch the Disney+ service. But Netflix still dominates the streaming charts, including some programming licensed from Paramount.

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