Why Paramount Should Beat Netflix | TCAF 222

Episode Overview

• The episode centers on the massive, unfolding bidding war for Warner Bros. Discovery (WBD), with the primary suitors being Netflix and a consortium led by David Ellison (Skydance) and RedBird Capital.
• Guest Bill Cohan frames the original Warner Bros. Discovery deal as a "publicly traded LBO," where CEO David Zaslav's main goal was to aggressively pay down debt to make the company an attractive acquisition target.
• The discussion delves into the complex deal structures designed to navigate regulatory scrutiny, particularly the Paramount bid's maneuvering to avoid CFIUS and FCC oversight regarding foreign investment in U.S. media.
• A key theme is the motivation behind the deal, questioning Netflix's strategic need for WBD given its market dominance and exploring the concept of "soft influence" as a driver for foreign capital.
• The conversation also touches upon a broader shift in Wall Street, where large banks are increasingly partnering with private credit firms to outsource riskier lending activities.

Key Concepts

• The bidding war for Warner Bros. Discovery between Netflix and a Paramount/Skydance/RedBird consortium.
• Warner Bros. Discovery's financial strategy as a "publicly traded LBO," prioritizing massive debt reduction to prepare for an eventual sale.
• The complex deal structure of the Paramount bid, in which foreign investors relinquished voting rights and board seats to avoid regulatory hurdles from CFIUS and the FCC.
• The concept of "soft influence" as a primary motivation for foreign investment in major U.S. media assets, prioritizing access and relationships over direct corporate control.
• Debate over the strategic rationale for the acquisition, particularly questioning why the dominant market leader, Netflix, would need to acquire WBD's assets.
• The role of political and regulatory timing, with speculation that the deal was timed to coincide with a potential change in administration and a more M&A-friendly FTC.
• The evolving structure of Wall Street finance, where large, regulated banks partner with private credit firms like Apollo to outsource riskier lending.

Quotes

• At 2:50 - "Netflix versus Paramount to acquire Warner Brothers. If and when this thing happens, it will be one of the largest not just media mergers of all time." - Josh Brown introduces the central topic of the discussion, highlighting the scale of the potential deal.
• At 5:30 - "I always viewed this as sort of a publicly traded LBO that as soon as this debt got paid down sufficiently... I always figured that the equity would pop." - Bill Cohan explains his initial investment thesis for Warner Bros. Discovery, emphasizing the company's focus on deleveraging before becoming a takeover target.
• At 10:17 - "When this was a single-digit stock... I remember the narrative... there was some regulatory reason why they couldn't do a deal, and then that was going to come off roughly around the same time that potentially we would have a change in the White House, Lina Khan would be gone at the FTC..." - Josh Brown outlines a prevailing theory that the timing of the WBD sale was strategically planned to coincide with a more favorable political and regulatory environment for M&A.
• At 22:42 - "They took away their voting rights and their board seats. So now they've given it all to, you know, the Ellisons and RedBird." - William D. Cohan explains the structural changes in the Paramount deal, suggesting it was done to avoid regulatory hurdles from CFIUS or the FCC due to foreign investment.
• At 23:15 - "They're investing for influence." - William D. Cohan responds that the investment is a play for "soft power" and access rather than purely financial returns or direct corporate control.
• At 28:32 - "Netflix already won... so that's why I and so many others were shocked because we understand why Paramount really needs these assets." - Michael Batnick questions the strategic necessity for Netflix to pursue a massive acquisition of Warner Bros. Discovery, given its already dominant market position.
• At 34:02 - "I think the odds are 55% that Paramount raises their bid and wins here." - William D. Cohan gives his prediction on the likely outcome of the bidding war for Warner Bros. Discovery's assets.
• At 48:15 - "They're kind of, they're getting their way into private credit and and this type of lending, but they're not getting their own hands dirty. And it's sort of it works for everyone in the ecosystem." - Josh Brown describes the new dynamic where large banks partner with or invest in private credit firms like Apollo to participate in lending without holding the risk on their own balance sheets.
• At 52:55 - "Trump likes a better-looking guy... So Kevin Warsh gets it because he's a better-looking... he's from central casting, Morgan Stanley." - William D. Cohan offers a cynical, appearance-based theory on why Kevin Warsh might be favored by Donald Trump for the Federal Reserve chairman position.

Takeaways

• In M&A, heavily indebted companies can create significant equity value by aggressively deleveraging to make themselves more attractive acquisition targets.
• Creative deal structuring, such as relinquishing voting rights, is a critical tool for navigating and neutralizing regulatory hurdles in sensitive sectors like media, especially concerning foreign investment.
• When analyzing large international investments, consider that the motivation may be the pursuit of strategic "soft influence" and access, rather than purely financial returns.
• Evaluate large acquisitions by market leaders critically to determine if the move is offensive (to cement dominance) or defensive (against a future, unforeseen threat).
• The financial system is increasingly bifurcating risk, with regulated banks outsourcing complex lending to the private credit market, a systemic shift that warrants monitoring.