Weekly Wrap: Netflix Cuts In On Paramount’s Dance With Warner Bros Discovery
Welcome back to Friday! This is our weekly wrap-up of economic, financial, and business news—proving that you can never step into the same stream twice.
It’s been quite a week in the world of media mergers and macroeconomic vindication. Netflix shocked everyone by convincing Warner Bros Discovery to sell it the good parts of the company for less than Paramount Skydance’s bid for the entire business. Does that count as deflation? Meanwhile, in news that will shock absolutely no one who’s been paying attention, inflation expectations continued their steady decline and consumer sentiment is creeping upward, particularly among independents, suggesting that voters might not be sharpening their pitchforks for Republicans ahead of the midterms after all. Let’s dive in.
Netflix Puts HBO Max In Its Queue
Netflix agreed to buy the studios and HBO Max streaming business from Warner Bros Discovery for $72 billion in cash and stock. That comes to $27.75 a share. The deal came as a surprise to many investors who had broadly assumed Netflix was not all that serious about bidding for the 102-year-old entertainment company.
One reason for that assumption was that Netflix did not want to buy all of Warner Bros Discovery—the streamer is not interested in the rusty old legacy media cable networks—and Wall Street assumed the Warner Bros Discovery board would prefer a deal for the full company. As it turns out, the board decided it likes the idea of breaking up the company and selling the shiny parts to Netflix. By the board’s math, the deal for the shiny parts values the entire company at around $31 to $32 per share. (Implying that those cable networks are worth two or three bucks per share—which suggests a negative value for CNN.)
“Over the past several months, the Board evaluated a full set of strategic paths,” Warner Bros Discovery chief David Zaslav wrote in a memo to employees on Friday. “Their conclusion is that this structure – Warner Bros. joining Netflix, and Discovery Global becoming a focused standalone company – provides the strongest long-term foundation for both sets of businesses.”
Netflix is also assuming around $10.7 billion of debt associated with the business, bringing what Wall Street calls the “enterprise value” of the deal up to $82.7 billion.
Paramount Skydance thinks the board is wrong to prefer the break-up sale. It had bid to acquire the entire company, setting off the formal sales process that drew in Netflix and Comcast. Now it is reportedly thinking of mounting a hostile bid for the company, going directly to shareholders. There’s a sizable obstacle to that deal: Warner Bros Discovery has agreed to pay a $2.8 billion heartbreak fee to Netflix if it decides to call off the deal to pursue a different merger.
An open question is whether the Netflix deal can get approval from antitrust regulators. The deal itself contains a hefty break-up fee of $5.8 billion that Netflix would have to pay to Warner Bros Discovery if the deal gets nixed by regulators, which implies that executives at Warner Bros Discovery consider this a non-trivial risk. Certainly, the combination of the largest streaming service with one of its largest competitors will at least merit a thorough review and probably require some promises by Netflix not to jack up the price of its services in the near future and to keep releasing films in theaters.
If the Trump administration’s antitrust officials do decide to block the deal, we expect an entertaining eruption of Trump Derangement Syndrome from liberals who will suddenly decide they like media consolidation.
The Tarifflation Panic Is So Over
The University of Michigan’s preliminary December read of consumer sentiment showed the fourth consecutive drop in year-ahead inflation expectations. These had exploded higher in the aftermath of the Liberation Day tariffs, rising from 4.3 percent in February to five percent in March to 6.5 percent in April and 6.6 percent in May. In the most recent reading, they are down to 4.1 percent.
Several months after President Trump’s tariffs were put in place, it’s now clear to many Americans that the inflation panic was overdone. Even Fed chairman Jerome Powell now admits that there’s been far less price pressure than he expected from tariffs. The Fed’s September projections showed inflation coming in at three percent this year and then falling to 2.6 percent next year.
There’s good reason for this rethinking. The Commerce Department’s personal consumption expenditure price index was released Friday and it showed that prices of durable goods—those most likely to face tariff price pressure—fell for the third consecutive month. Compared with a year ago, durable goods prices are up just 0.9 percent. The tarifflation story is past its expiration date and American consumers are noticing.
‘Tis the Season to Be Jolly
Speaking of consumer sentiment, it improved in December, according to the University of Michigan’s survey. Okay. Fine. Maybe consumers are not exactly jolly—the index is down 28 percent from a year ago—but they aren’t anywhere near as gloomy as they were a few months ago.
Notably, the rise in the index came because of increased optimism about the future, which is due in part to declining inflation expectations. Importantly, the largest gain in the expectations gauge came from young people and political independents. The index among independents jumped from 45.9 to 53.7. That should provide some assurance to Republicans worried that they’ll get clobbered in the midterm elections by voters downbeat about “affordability.”
Our favorite explanation for improving consumer sentiment is that people did not fight as much on Thanksgiving and prices for the feast were down this year compared to last. Based entirely on anecdotal evidence, we’re convinced that this year saw fewer family feuds over politics than any time in the last ten years. We certainly noticed a lot fewer articles on the liberal side of the internet advising progressives how to excommunicate Trump supporters from our national day of Thanksgiving.
Happy Birthday Finland!
Saturday marks the 108th anniversary of Finland’s declaration of independence from Russia on December 6, 1917. After more than a century as a Grand Duchy in the Russian Empire, the Finnish Parliament seized the opportunity presented by the chaos of the Bolshevik Revolution to break free and build its own sovereign nation.
The timing was impeccable. Revolutionary turmoil had left the newly-formed Soviet state in no position to contest Finland’s departure. What followed was a remarkable transformation: a small Nordic nation of just a few million people built one of the world’s most prosperous and well-governed democracies, complete with a robust welfare state funded by—gasp—actual economic productivity rather than revolutionary expropriation.
Edmund Wilson’s 1940 masterwork To the Finland Station takes its title from Lenin’s famous arrival at Petrograd’s Finland Station in April 1917, when the revolutionary leader returned from exile to lead the Bolshevik Revolution. The irony is that Lenin stepped off the train at Finland Station to seize the Russian Empire, while the Finns were preparing for their own exit from that empire. Within months, they used the chaos he unleashed to declare independence.
Read the full article here