Now to the biggest M&A news of an already wild year…

Let’s review a sampling of my texts and D.M.s from last night:

“Please turn out the lights on the Hollywood sign.” “R.I.P. cinema, 1895-2025.” “They did it. They killed Hollywood.” A bit dramatic? All I can say is, what a day for the Albanian army. Back in 2010, when Time Warner’s C.E.O. made that infamous comparison, Netflix’s Reed Hastings handed out army berets as motivation. Now that Netflix, just 15 years later, has agreed to pay $82.7 billion ($72 billion in equity value) for Warner Bros. and HBO Max, maybe current C.E.O.s Ted Sarandos and Greg Peters should lead a full regalia ticker-tape victory parade through Burbank. Many people in town seem to be soiling themselves over this news. Industry guilds and advocacy groups have started to put out threatening statements. An anonymous group of producers sent a letter to Congress expressing “grave concerns” about Netflix owning Warners. A rumor spread yesterday that one of the agencies would organize an industrywide petition opposing the deal. (That’s not confirmed.) And I get why. The slow-moving mudslide of Hollywood consolidation just claimed perhaps its most old-guard and prolific studio—the home of Casablanca and Dirty Harry and Police Academy 4: Citizens on Patrol. Any time a stand-alone buyer exits the market, the entire creative community usually takes a hit. When I broke news Tuesday that Wicked director Jon M. Chu was leaving Warners for Paramount after being courted by Universal, I couldn’t help but think that that doesn’t happen without multiple players all vying for the best content.

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But also… it’s Netflix. Netflix. The company that doesn’t give its movies big theatrical releases will now own the studio that invented the modern theatrical tentpole strategy with The Perfect Storm back in 2000. The streamer willing to throw on quickie true-crime slop or video podcasts or whatever Happy Gilmore 2 was will now control HBO, the brand synonymous with quality TV and only quality TV. While Warner Bros. once fronted its top producers millions of dollars against their eventual profit participation, Netflix doesn’t pay backends. Warners often wins movie projects by convincing talent that the studio is not like Netflix, just as HBO Max pitches itself to creators as the anti-Netflix. Despite its assimilation into the industry, Netflix is still an interloper to many. And now it’s buying the ultimate piece of Hollywood establishment.

So… how exactly did this happen? Last night and this morning, I checked in with sources close to the deal process, and they painted a picture of an underestimated Netflix machine simply outmaneuvering Paramount and the Ellison family despite having never acquired an asset even close to this size. Combine that with a seller in Warner Discovery C.E.O. David Zaslav who pretty clearly preferred one buyer over the others, and Netflix’s belief that it could overpay and still make the math work. “These assets are more valuable in our business model, and our business model is more valuable with these assets,” a tired-sounding Sarandos said on an investor call this morning. Maybe, but the Netflix stock is down today, and analysts so far aren’t gushing like they usually do. With Warners, Netflix “transitions from pure, organic growth elegance to something more complicated,” Peter Supino of Wolfe Research wrote to clients just now. (Disclosure: As a result of our recent acquisition of Air Mail, Zaslav has become a de minimis investor in Puck.) Remember, Paramount had a big head start here. David Ellison was talking about going after Warner Discovery well before he closed the Paramount transaction in the summer, and months before my colleague Kim Masters first reported his interest on August 5. Ellison had momentum from the Paramount deal, infinite resources via his father, a strong narrative of scaling up to battle Big Tech, and the Trump administration in his corner. The Paramount game plan was to box out others, like Apple and Amazon, for which WBD’s garbage television networks were a nonstarter. Ellison would go after all of the company before Zaslav had a chance to split it in two, taking it off the table quickly and cleanly, with U.S. regulators happy to help. But alas… Ellison didn’t count on Netflix being able to get its collective act together on a tight deadline and with a coherent bid, much less a strategy that Zaslav could sell to the board. Back in early October, Peters declared at a Bloomberg conference, “One should have a reasonable amount of skepticism around big media mergers—they don’t have an amazing track record over the history of time.” Indeed, Netflix has always dismissed these kinds of transformative M&A deals as distracting and a sign of overall weakness. Build not buy. Clarity of focus. But that comment turned out to be a very persuasive head fake. That very day, the company was already putting together its plan. Like everything at Netflix, it’s gospel until it’s not. During the expedited process, Netflix operated efficiently and Sarandos effectively leveraged his friendship with Zaslav, who seemed more than eager to extend a middle finger to the overzealous Ellison kid. In the end, Netflix kinda flipped the Ellison strategy and used it against Paramount, moving faster and more cleanly and ultimately offering $27.75 per share ($4.50 of that in stock). Not the $30 that investor/puppet master John Malone thought was “possible,” but what Zaslav and his board needed to say yes to a take-it-or-leave-it ultimatum. And once again, a remarkable turn of events for Zaz, who in more than three years, managed Warner Discovery from $24 a share down to around $7 or $8, only to be rescued by this sale. The guy destroyed so much value and so many jobs to save his flailing Discovery Communications, all while keeping his eye on his own outsize compensation, and he’ll probably end up with well over $500 million in additional winnings and either a cushy role at the new company or a spot on the Netflix board. Kinda unbelievable.

You can almost picture David Ellison stomping around the Malibu house, or one of the Lanai spreads, or the Tahoe lair, shouting at Larry like Veruca Salt in a bomber jacket. “But I want it, Daddy! I want it NOW!” Such is the indignity of the centibillionaire owners of one studio having to watch as Netflix, a regular old publicly traded company run by regular old executives, swooped in.

Desperation is the only possible explanation for yesterday’s public tantrum thrown by the Ellisons via a three-page lawyer letter to Zaslav and his advisors. Ellison assumedly saw this deal slipping away, and claimed that WBD “appears to have abandoned the semblance and reality of a fair transaction process,” thereby confirming all the rumors ricocheting around town that Netflix had presented the highest offer—or, rather, the highest offer by the metrics that Zaslav and his board were using—and that Ellison believed the fix was in. You don’t send that letter if you’re winning. So, what will the Ellisons do now? It’s not over, of course. Far from it. The way those close to the transaction see it, there are three ways this whole thing can still fall apart. 1. Regulators block the deal Even the biggest cheerleaders of this transaction admit it’s gonna be a bitch to get approved. Allowing Netflix, the dominant streamer with 300 million global members, to gobble up a primary competitor in HBO Max and its nearly 130 million subs, is asking for a fight in this country and others. It’s now up to Steve Sunshine, the Netflix antitrust expert at Skadden, to do the “But actually…” thing by comparing Netflix to the larger YouTube or TikTok or even to the combined linear and digital platforms of Disney, which beats Netflix in the distributor rankings in Nielsen’s monthly Gauge report. But citing the so-called “category ambiguity” argument—essentially, that Netflix competes against everything else vying for eyeballs or even leisure time (check out this article by Yale professor Fiona Scott Morton for more)—or using the viewership on dying TV networks as evidence of competition in the entirely different and ascendant business of subscription streaming seems like… a stretch. “Netflix remains the dominant global player and shows no sign of slowing down,” MoffettNathanson wrote in a report this week, citing its $11.5 billion in revenue this past quarter and “industry-leading +17 percent growth.” Jessica Reif Ehrlich’s team at BofA Securities concurred: “If Netflix acquires Warner Bros., the streaming wars are effectively over,” they wrote in a recent client note. That scorched-earth Ellison letter also served as a reminder that Trumpworld would very much prefer Paramount buy CNN. As if on cue, Mike Lee, the Utah Republican who chairs the Senate Judiciary Subcommittee on Antitrust, yesterday declared that the Netflix bid “would raise serious competition questions—perhaps more so than any transaction I’ve seen in about a decade.” Steve Bannon told my colleague Peter Hamby that “Gail Slater at Justice and the F.T.C. should be all over this media consolidation—it’s out of control.” The New York Post, which has pretty consistently mirrored the White House messaging, reported that the D.O.J. will likely conduct an expansive antitrust review of any Netflix deal—and that could go beyond just WBD to examine its larger business practices. Would you be shocked if Trump chimed in publicly today about Netflix and the “rigged” process? Would you be shocked if he doesn’t? (By the way, Paramount could still buy CNN from the spun-off Global Networks business.) A D.O.J. lawsuit and protracted litigation may follow—the same kind of expensive and risky distraction that plagued AT&T’s purchase of Time Warner during a key period of the late-teens streaming wars. People in Hollywood may be concerned about the impact of this deal on everyone except Netflix. But what if this kind of disruption is catastrophic for Netflix? The company has evolved significantly over the years, but it has never absorbed an entirely separate media conglomerate. Plus, “When is this going to close?” one veteran exec D.M.’d me last night, predicting several lawsuits. “Q2 of 2028? What happens between now and then? Has no one at Netflix read a single case study on M&A? Do they think their organization is going to behave as usual as they get put through the regulatory ringer… globally?” On the call today, Peters insisted Netflix would avoid the bad outcomes of other media mergers because “we understand the assets we are buying.” And if the U.S. or other countries block the deal, the Paramount letter lays the groundwork for Ellison to bide his time and reengage on WBD. But that could take months or years. And given how fast the puzzle pieces of Hollywood are being realigned, Ellison may not have the ability or the patience to wait that long.

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2. The Ellisons go nuclear Do we think Larry and David are just gonna accept defeat and quietly go about making their Family Plan sequels and new seasons of Landman? Doubtful. Paramount could go hostile and take its pitch directly to WBD shareholders, or even sue, arguing that Zaslav and his buddy Ted conspired early—maybe on their recent Vegas trip to the UFC match?—to deliver these assets to Netflix, thus allowing the desired split of the TV side of WBD to happen, and maybe maintaining a C-suite job for Zaslav, a massive paycheck, and his ability to host dinner parties that Margot Robbie feels compelled to attend.

It was all pretty rich, of course, because the Ellisons spent the better part of the past year trying to rig the sale process via bootlicking of the Trump administration. From installing Bari Weiss at CBS News to taking on Brett Ratner’s Rush Hour 4 after everyone in town passed, Paramount has been seen as a more likely acquirer of Warners in part because it has positioned itself as so Trump-friendly. Too much so, I think. Paramount and its top lawyer Makan Delrahim wanted us all to believe it was the only acquirer that could be approved. Which may end up being true, but the board didn’t buy it. That was then; now, playing the victim could be a better strategy. 3. Ellison can make it rain I’ve long subscribed to the money wins theory of dealmaking, and the fact remains that the Ellisons have a ton of it lying around. At any time, they can come in with a bigger offer, just like Comcast did after Disney and Fox announced their transaction in 2017. If that happens, WBD would owe Netflix a $2.8 billion termination fee, which WBD would kindly ask Paramount (or Comcast) to reimburse. Nearly $3 billion extra isn’t nothing, but if you’re gonna pay $70 billion or $80 billion for a Hollywood studio and streamer, what’s a few more?

It’s far too early to start evaluating whether Netflix will be the best steward of a studio and streamer that have been tossed around for so long that it’s become comical to everyone except those who still work there. For now, the Warner Bros. movies will still get theatrical windows, and HBO Max will operate separately. (I’m really praying Netflix renames it HBO so we can truly come full circle.) But there’s at least an argument that this is the best of three bad outcomes for this company.

Despite Ellison’s messaging about “investment,” Paramount buying Warners was a pure consolidation play for him, smashing together two similar film and TV studios, two complementary streaming platforms, two news divisions, etcetera. Maybe the Ellisons would have put a full slate of Warner Bros. movies in theaters like they promised, but everything else merges and thousands more people are fired. Same with Comcast, basically. But with Netflix, maybe the better question to ask is, What are they missing? Or How does Warner Bros. give them what they don’t have now? That’s ultimately why I think Sarandos went so hard after this deal, even though the company doesn’t need it nearly as much as the others. For the first time, Ted is getting a quality film library, which Netflix knows from engagement data is a primary driver of viewership. A new report from Reelgood reveals the Netflix movie count would increase by 52 percent (from about 4,400 titles currently on the service to 6,629) if it adds just what is currently on HBO Max. And no disrespect to the Russo brothers, but think about how much better those Warner movies are than what Netflix has been making. Sarandos is also getting a trove of adaptable I.P. He’s getting a pristine TV brand in HBO, though he and Peters wouldn’t say if it will ultimately be bundled with Netflix or appear as an upsell tile. Netflix currently has tons of volume and not a lot of superpremium, so that’s additive. He’s also getting a lucrative TV licensing business in Warner Bros. Television, which can allow Netflix to expand into producing shows for other platforms. And, of course, he’s getting a theatrical movie studio, which, depending on whom you believe, Netflix either intends to keep as a theatrical movie studio or honor existing contracts while slowly starving it to death. I’m skeptical of Ted’s long-term interest in theaters, and Michael O’Leary, head of the exhibitor lobbying group Cinema United, said last night that the Netflix/WBD deal “poses an unprecedented threat to the global exhibition business.” This morning, though, Ted insisted that Netflix will honor theatrical windows for WB movies, at least at first. He also said he would “evolve” that strategy down the line. I think we know what that means. All of these will be relatively new things for Netflix, which is scary because they could be screwed up royally or simply sacrificed at the altar of the existing business. But if Netflix jumps through all the hoops to get the deal done, and actually honors the pledges its leaders made today, maybe it’s not as disastrous as everyone in Hollywood is now trained to expect. The sad reality is that Warner Discovery was destined to be carved up and sold the day the company was created. At least we know Netflix-Warner can’t be worse than AOL Time Warner. Right? Right?

See you Monday, Matt

Correction: Mariah Carey is not a PMK client and hasn’t been for years. Apologies for the error on Monday. And the list of major streamers not available on Prime Video Channels includes Hulu, which was omitted on Wednesday. Got a question, comment, complaint, or a consolation prize for Paramount? Email me at Matt@puck.news or call/text me at 310-804-3198.

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