BREAKINGVIEWS-How to script a Hollywood ending for Warner Bros

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Jennifer Saba

NEW YORK, Dec 17 (Reuters Breakingviews) - Audiences love a Hollywood ending. Investors in the rival media giants fighting over Warner Bros Discovery WBD.O might welcome one too. Paramount Skydance PSKY.O and Netflix NFLX.O have tossed aside financial wisdom in their pursuit of the movie and TV group. Rather than continuing a crazy bidding war, splitting the spoils would provide a neater finale.

WBD's board on Wednesday recommended its shareholders reject Paramount boss David Ellison's $30-per-share cash tender offer, preferring the streaming giant's for its movie studio and HBO streaming service. Nevertheless, Ted Sarandos and Greg Peters, Netflix's co-chief executives, remain under pressure to raise their cash-and-stock offer worth $27.75 per WBD share.

Netflix shareholders are already on the edge of their seats. The company's market value has shrunk by nearly $125 billion since the beginning of September as investors question its uncharacteristic deal appetite. The combination will likely also face heavy regulatory scrutiny. Fresh data from Nielsen, released on Tuesday, showed that Netflix had the second-highest streaming share of U.S. TV viewing behind YouTube in November.

The Paramount camp also faces constraints. Ellison’s father, Oracle ORCL.N founder Larry Ellison, plans to backstop Paramount's large equity check. He borrowed against the tech giant’s stock. Yet Oracle shares are down approximately 35% since September, hampering his son's ability to offer even more cash. Complicating matters further, Affinity Partners, the investment firm run by President Donald Trump's son-in-law Jared Kushner, withdrew from the battle on Tuesday, Bloomberg reported. That raises doubts over the White House's favor of the Ellisons, and the appetite of Middle Eastern investors helping bankroll Paramount's offer.

Orchestrating a truce would allow everyone to come out a star. Here's how it could work: Paramount would get HBO and the TV networks including CNN, boosting its ambitions in streaming and news. Assume it pays 16 times next year's estimated EBITDA for HBO and a multiple of 5 times for the networks, using Visible Alpha forecasts, and the enterprise would be worth almost $58 billion. If Paramount can squeeze out synergies equivalent to 15% of revenue from those units - the same ratio it promised in its offer for the whole company - it would make savings worth $4 billion. That would yield a respectable 9% return on its investment, after taxes.

Meanwhile, Netflix could avoid the complication of owning two streaming services by snapping up the studio behind franchises like Harry Potter. On a multiple of 20 times expected EBITDA for 2026, the business is worth about $52 billion, according to Breakingviews calculations. An agreement guaranteeing Paramount a pipeline of TV shows and movies could lock in future revenue.

Total it all up and the parts are worth $110 billion. Back out net debt of $30 billion and it equates to a tasty $32 per WBD share. If the bidders can set ego aside, this rewrite could have blockbuster potential.

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CONTEXT NEWS

Warner Bros Discovery on December 17 said its board had rejected a $30-a-share all-cash offer from Paramount Skydance, arguing the proposal's value is inadequate and there are risks associated with the financing. Paramount on December 8 initiated a tender offer which values the company at $108 billion including debt. WBD had previously agreed to sell its film studio and HBO streaming service to Netflix for $83 billion including debt. The board said Netflix's terms are superior to Paramount's.

WBD shares were down 1% at $28.60 in early trading in New York on December 17.

(Editing by Peter Thal Larsen; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on SABA/jennifer.saba@thomsonreuters.com))