Netflix's $72B Warner Bros. Acquisition: Can Regulatory Hurdles Derail the Growth Offensive?

Netflix's $72 billion deal to acquire Warner Bros. Discovery's streaming assets would merge its 300 million subscribers with HBO Max's 128 million users according to CNBC. The combined entity would command a dominant 56% share of the global streaming market while unlocking $2–3 billion in annual cost savings.

The move comes amid fierce consolidation as competitors like Paramount Global made their own $108 billion hostile bid, but Paramount's withdrawal leaves Netflix as the dominant acquirer. Netflix is betting the acquisition will fuel its AI-driven content strategy, targeting $6–7 billion in ad revenue by leveraging Warner Bros.' vast library to train AI tools and personalize ads.

However, while Paramount's withdrawal removes immediate competition, execution risks remain significant. Regulatory scrutiny is mounting, with politicians and agencies raising antitrust concerns that could delay approval for 12–18 months. If blocked, Netflix would pay a $5.8 billion breakup fee. The transaction is also heavily debt-funded-nearly $11 billion in new borrowing-and critics say it trades at a 25x EBITDA multiple, making it an overpriced bet.

Regulatory and Financial Risks

The proposed Netflix-Warner Bros. Discovery merger faces significant regulatory headwinds, including intense DOJ antitrust scrutiny and a complex 18-month approval timeline. A $5.8 billion breakup fee adds financial pressure if regulators block the deal, despite Netflix's confidence in securing approval. This regulatory uncertainty creates a substantial risk that could derail the transaction and trigger significant costs.

Warner Bros.'s financial health presents additional concerns. The company reported an 18% year-over-year decline in Adjusted EBITDA to $2.4 billion during Q3 2024, signaling weakening profitability. Compounding this, Warner Bros. maintains a leveraged position with net debt at 4.2 times its earnings, raising questions about its ability to sustain heavy borrowing for the merger. While the firm held $3.5 billion in cash, this buffer may prove insufficient against prolonged regulatory delays or further earnings pressure.

Netflix's own financial strategy raises eyebrows. The $72 billion acquisition carries a 25 times EBITDA multiple, widely viewed by the analysts as overpriced.

While Netflix executives see long-term value in Warner's content library and advertising revenue potential, the immediate burden of acquiring a heavily indebted company during a period of declining performance creates substantial short-term financial friction.

Despite these challenges, Netflix argues the combination creates essential scale for competing in an AI-driven entertainment landscape, leveraging Warner's vast content library. However, the high debt burden and regulatory hurdles create a delicate balancing act. If approval takes the full 18 months or if earnings continue deteriorating, the financial strain could intensify, testing Netflix's willingness and ability to see the deal through. The merger's success hinges on navigating both regulatory minefields and Warner's current financial underperformance.

Valuation & Catalysts: Scenarios for Shareholder Value

The $72 billion acquisition hinges on two divergent paths. The bull case assumes Netflix achieves its projected $6–7 billion in AI-driven ad revenue, justifying the premium valuation through higher EBITDA multiples. This scenario requires overcoming regulatory hurdles while capitalizing on Warner Bros.' content library to accelerate ad-supported subscription growth, which could push combined platform reach past 400 million users. However, delays in DOJ approval beyond 18 months could trigger a $5.8 billion breakup fee, straining Netflix's $3.5 billion cash position and pushing leverage above 5x.

A bear case emerges if Paramount or Comcast revive acquisition attempts, exploiting regulatory skepticism around reduced competition. Sen. Warren's antitrust warnings and historical DOJ review timelines suggest prolonged uncertainty. Even with Warner Bros.' recent 7.2 million subscriber gain on Max, thinning streaming margins and $1.6 billion in acquisition amortization costs could pressure profitability. Should the deal collapse, Netflix faces $11 billion in debt servicing costs while losing synergies from Charter Communications partnerships and Olympic viewership momentum.

Key catalysts will unfold through 2025. The DOJ's decision by Q3 remains pivotal, while a potential WBD network spin-off could reshape asset valuation. Meanwhile, Max's 7.2 million subscriber growth demonstrates operational traction, but Netflix's AI advertising bets remain unproven at scale. The deal's success ultimately depends on navigating regulatory storms while converting Warner Bros.' content library into sustainable ad revenue-a high-risk, high-reward proposition requiring both technical execution and political acumen.