Paramount bets on European regulators to block WBD-Netflix deal

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The future of the Warner Bros. Discovery company – its iconic movie studio, HBO Max, and its cable networks, including CNN, TBS, TNT, Discovery and HGTV – may come down to what European regulators think about Netflix.

That’s a pretty crazy twist for a deal that will dictate the future of many valuable American sports rights – assets that, for the most part, have very little to do with Europe.

A quick refresher: WBD owns many live U.S. sports rights, including those to March Madness, Major League Baseball, the National Hockey League, NASCAR, the French Open, AEW, the College Football Playoffs and others. But those rights wouldn’t go to Netflix under WBD’s agreed-upon deal to sell some of its assets to the streaming giant.

Netflix has agreed to pay $27.75 per share for the WBD movie studio and streaming business, but not the cable networks, which own the sports rights. If the deal is approved, those networks would get spun out into a separate publicly traded entity called Discovery Global, which would also own Bleacher Report, House of Highlights and WBD’s other digital assets.

If WBD shareholders accept a hostile takeover attempt from Paramount Skydance, however – and if that deal is approved – the cable networks and associated sports would all fall under the Paramount umbrella. Paramount has bid $30 per share for the entirety of WBD – an offer it has taken directly to shareholders after the WBD board rejected it.

Paramount on Thursday extended the deadline on its tender offer — which expired Wednesday — giving WBD shareholders more time to weigh the option.

WBD responded with a statement, noting that less than 7% of all shareholders have tendered their shares thus far to Paramount.

“Once again, Paramount continues to make the same offer our Board has repeatedly and unanimously rejected in favor of a superior merger agreement with Netflix. It’s also clear our shareholders agree, with more than 93% also rejecting Paramount’s inferior scheme,” WBD said. “We are confident in our ability to achieve regulatory approval for the Netflix merger and look forward to delivering the tremendous and certain value our agreement will provide to Warner Bros. Discovery shareholders.”

Most media attention has focused on what U.S. President Donald Trump might think about a Netflix-WBD deal. Netflix co-CEO Ted Sarandos met with Trump ahead of the deal to gauge his sentiment on a transaction. The U.S. Department of Justice — theoretically an independent body from the presidency – will ultimately decide whether or not the deal presents antitrust problems, and if those issues can be ameliorated with conditions or if they’re simply too big for a deal to go through.

There’s been far less attention paid to Europe, which will also need to approve a deal. And that’s where either deal could fall apart. 

Netflix is a global company, generating about $14.5 billion in revenue in its “EMEA” (Europe, the Middle East and Africa) region last year, or about 32% of total sales. 

WBD feels confident its Netflix deal will win EU approval, according to people familiar with the matter. A WBD source said there was a “95% certainty” that Europe would approve the transaction, though the person did acknowledge Netflix may need to agree to certain conditions, such as agreeing to produce a certain amount of local content in Europe and promising to release movies into theaters. The EU’s Audiovisual Media Services Directive already mandates that video-on-demand streaming services ensure at least 30% of programming in EU countries qualify as European works. 

Paramount disagrees and believes a Netflix deal has very little chance of making it past European regulators, according to people familiar with the matter. At the same time, it’s working its own EU regulatory angles for its proposed takeover.

It would be unusual but not unprecedented for European regulators to block a deal between two U.S.-based companies. Amazon dropped its $20 billion acquisition of cloud software company Figma in December 2023 after deciding there was “no clear path” to gaining antitrust approval in Europe and the U.K. The U.K.’s Competition and Markets Authority also forced Meta’s Facebook to sell Giphy, the largest supplier of animated gifs to social networks, in 2022.

It’s also worth noting the European Commission allowed Amazon to acquire MGM, perhaps the closest comparison in terms of comparative businesses to this deal.

Paramount’s confidence stems from the continent’s track record of being tough on tech companies, with antitrust crackdowns and penalties targeting Meta, Microsoft, Google, Apple and Amazon in recent years. Paramount executives believe EU regulators view Netflix similarly, based on recent conversations they’ve had with European officials, according to people familiar with the matter. Given the chance to stop a Big Tech company from gaining even more market power, Paramount executives believe Europe will take it.

The EU may also be more parochial in how it treats movie theater owners, viewing them as essential to culture and art. Both U.S. and European trade associations for the cinema industry have publicly expressed their displeasure with a Netflix-Warner combination.

This week, Sarandos reiterated that Warner Bros. films will be released in theaters with a 45-day window — as they always have.

“We’re working closely with WBD and the regulatory authorities, including the U.S. Department of Justice and the European Commission. We’re confident we’re gonna be able to secure all the approvals,” Sarandos said Tuesday during Netflix’s earnings conference call. “When this deal closes, we will have the benefit of having a scaled, world-class theatrical distribution business with more than $4 billion of global box office. And we’re excited to maintain it and further strengthen that business.”

The WBD board viewed two movie studios coming together – Paramount and Warner – as a bigger regulatory hurdle than any issue presented by Netflix, according to people familiar with the matter. Still, WBD’s lawyers have determined both deals – Netflix-WBD and Paramount-WBD – would likely gain approval.

“The WBD Board carefully considered the federal, state, and international regulatory risks for both the Netflix merger and the [Paramount tender] Offer with its regulatory advisors,” WBD said in a December corporate filing. “The WBD Board is of the view that each transaction is capable of obtaining the necessary U.S. and foreign regulatory approvals and that any difference between the respective regulatory risk levels is not material.”

On the movie theater issue, a Warner source told me WBD actually views Paramount as a potentially bigger issue than Netflix. That’s because WBD’s board and executives aren’t sure Paramount will have the money to produce 30 or more movies a year (a Paramount CEO David Ellison promise) while also paying down billions of dollars in debt and targeting $6 billion in cost savings. 

This is why the structure of the Paramount deal is so important to WBD. To create a superior deal for WBD, Larry Ellison, David’s father and one of the world’s wealthiest men, would need to put up more money in equity to lower the leverage ratio of a combined company. The board doesn’t trust Paramount can deliver on its synergies while also meeting its aggressive theatrical goals and moving forward with a leverage ratio over 7-times estimated 2026 EBITDA.

This week, Netflix changed its offer for WBD’s assets from mostly cash to all cash. Simplifying the bid allows WBD to move its shareholder meeting to approve the Netflix offer earlier – possibly as early as March, according to a person familiar with the matter.

Paramount is still considering if it wants to raise its bid or change the capital structure to re-engage the WBD board, according to people familiar with the matter. It could also do nothing and wait to see if it’s right about regulators – either European or American – blocking a Netflix deal.

With so much attention on the importance of live sports to the TV industry, it’s unusual to see them as such an afterthought. Paramount executives have argued the value of Discovery Global should be $0 based on its high leverage ratio and the early valuation of Versant, the parent company of CNBC, which has traded down almost 30% since it debuted on the public markets this month.

In a corporate filing released Tuesday, WBD argued Discovery Global should be valued between $1.33 per share and $6.86 per share, depending on estimates.