WBD's Netflix Bet: A Tactical Stand or a Shareholder Trap?

The immediate event is a boardroom rejection. On Wednesday, Warner Bros. Discovery's board unanimously advised shareholders to reject Paramount's revised $108.4 billion hostile bid, calling it "inadequate" and overly risky. This is the latest chapter in a drawn-out auction, but the board's stance is now unequivocal. Its core argument is a stark contrast in financial structure and risk.

Paramount's plan, the board insists, is a "risky leveraged buyout" that relies on "an extraordinary amount of debt financing". The proposed structure would require the smaller studio to incur more than $50 billion in incremental debt, creating what the board frames as the "largest LBO in history." This, they argue, poses "materially more risk for WBD and its shareholders" than the Netflix deal, including the "possibility of the whole takeover plan falling apart."

The board's commitment to the Netflix path is reaffirmed. It continues to tout the "certainty of the Netflix merger" as a key advantage over Paramount's debt-laden, uncertain structure. This is not a minor preference; it's a fundamental assessment that the Netflix deal's conventional merger mechanics offer a clearer, lower-risk path forward for WBD's streaming and studio assets. The board's letter, accompanied by a detailed 67-page filing, lays out this case for shareholders to reject the revised Paramount offer.

Valuation & The Shareholder Gambit

The board's stance creates a clear tactical bet for shareholders. The stock's explosive run has already priced in a significant portion of the potential upside. Shares of Warner Bros. Discovery have soared more than 170% for the year, lifting its market cap to about $72 billion. This surge is the direct result of the M&A battle triggered by David Ellison's aggressive pursuit. Now, the immediate risk/reward hinges on the gap between the board's preferred deal and the hostile offer on the table.

The scale of the potential payouts is stark. Paramount's revised bid is for $108.4 billion, a premium to the current market value. In contrast, Netflix's deal is a partial acquisition valued at $82.7 billion. The board is betting that the "certainty" of the Netflix merger-its conventional structure and lower perceived execution risk-outweighs the higher cash price Paramount offers. Yet, the hostile nature of the Paramount offer means shareholders are not bound by the board's recommendation. If the company demands a vote, they could ultimately choose the larger sum.

This sets up a classic gambit. The board is urging shareholders to accept a known, albeit lower, value to avoid the "materially more risk" of a massive leveraged buyout. The alternative is to reject the board's advice and wait for a potential vote that could deliver a higher price, but with no guarantee the deal will close. The stock's massive rally has compressed the near-term upside from the Netflix path, making the Paramount offer's higher valuation a tangible, if uncertain, alternative. The event-driven setup is now a binary choice: stick with the board's lower-certainty, lower-price deal, or gamble on the hostile offer's higher price falling through.

Immediate Catalysts & Execution Risk

The board's thesis now faces a near-term test. Paramount's revised tender offer, which includes a $5.8 billion termination fee and an extended deadline for the tender to later in January, creates a clear catalyst for a shareholder vote. This is the event that will force the market to choose between the board's preferred path and the higher-cash, higher-risk alternative. The clock is ticking, and the outcome will be determined by a vote, not just board advice.

The mechanics of each deal present starkly different execution risks. Paramount's full acquisition is framed as the "largest LBO in history", a structure that relies on securing financing. The board's key argument is that this leveraged buyout poses "materially more risk for WBD and its shareholders" than the Netflix merger. The proposed structure would require the smaller studio to incur more than $50 billion in incremental debt. The board points out that "changes in the performance or financial condition" of either company or the industry could jeopardize these financing arrangements. This creates a vulnerable point of failure that the board believes the Netflix deal avoids.

Paramount's attempt to mitigate this risk was to secure a guarantee from billionaire Larry Ellison as a backstop. Yet, the board contends this is insufficient. It argues that even with this guarantee, the termination fee of $5.8 billion would only net out to about $1.1 billion for WBD after the company must pay Netflix a $2.8 billion fee, plus interest and other costs. This, the board says, is an inadequate cost shield if the deal collapses. In contrast, the Netflix agreement includes a termination fee that is structured to cover WBD's costs more directly.

The board also highlights a different kind of risk: legal. It notes a report that Paramount is plotting a "DEFCON 1" lawsuit should WBD not accept the deal, calling the acquirer a "litigious counterparty." This adds a layer of uncertainty and potential cost to the Paramount path that the conventional merger with Netflix does not carry. The immediate catalyst is the shareholder vote, but the underlying execution risk for the Paramount offer is its complex, debt-dependent structure and the potential for a costly legal fight if it fails.