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Welcome back to the Rundown for another weekend deep dive. Today we are talking about one of the biggest deals in media history. Netflix buying Warner brothers discovery for $83 billion. And this deal could have a massive impact on the world of streaming in Hollywood as we know it. So in today's episode, we take a look at how this deal came together, why Netflix felt like they had to do this deal, the bull and bear cases, the winners and losers, and of course, the backlash and regulatory issues that Netf is about to deal with. We got a great one for you today. Let's dive in now. Before we sink our teeth into this deal, let's do a quick history lesson. You know, Netflix has been the underdog in Hollywood since the beginning. Back in 1998, they started off mailing DVDs to people's homes and Blockbuster pretty much ignored them as a threat. In fact, Blockbuster had a chance to acquire Netflix at one point, but didn't. By the time the late 2000s came along, Blockbuster was in decline and eventually went out of business because of Netflix's DVD service. Then in 2007, Netflix started streaming shows and movies over the Internet and Hollywood still ignored them. In fact, in 2010, Time Warner CEO Jeff Bewkas said that worrying about Netflix was like worrying that the Albanian army would take over the world. Not sure if he was making like a taken reference there or what, but Time Warner was the parent company of HBO at the time and also a ton of other media assets and they were totally ignoring Netflix. Well, in 2013, Netflix fired back. Netflix executive now CEO Ted Sarandez said back in 2013 that the goal is for Netflix to become HBO before HBO became Netflix. And Netflix did just that by releasing their own original show, starting with the House of cards in 2013, which was a smash hit. I remember watching it when it first came out. It felt like a HBO style show. And that was really a turning point when Netflix became a serious threat to the traditional Hollywood studios. Fast forward to today. Netflix is the most powerful media company in Hollywood and they just bought HBO along with the rest of Warner Brothers Studios. So now let's get into the deal and how this is going to shake up the entertainment industry. Warner Brothers Discovery put themselves up for sale back in October. They had been struggling for years now, but that's a topic for a different deep dive. Now, most people didn't think that Netflix would put in a bid to buy Warners. In fact, Netflix was downplaying it the whole time. Co CEO of Netflix Greg Peters was on stage in October Saying that media M&As don't work. Pointing to all the merger disasters involving Warner Brothers in the past. There's been some reports around you guys being interested in Warner Brothers discovery. Is there any truth to that? I'd say this. You know, we come from a deep heritage of being builders rather than buyers. I also think that it's, you know, one should have a reasonable amount of skepticism around big media mergers. They don't have an amazing track record over, you know, the history of time. So that's why most analysts expected that Paramount, which is now run by David Ellison, the son of Oracle founder Larry Ellison, would end up buying wbd. And Paramount did in fact put in a competitive bid. So did Comcast, which owns NBC and the streaming service Peacock. But the best bid, surprisingly came from Netflix. Netflix is paying WBD shareholders 23.25 in cash per share and also $4 and 50 cents in Netflix stock on top. That puts this deal at an equity value of $72 billion. But if you add in the $11 billion in debt that Warner Brothers has on their balance sheet, Netflix has to take that on, which we'll talk about in a bit. So overall, the total enterprise value of this deal is $82.7 billion. Now here's where things get interesting. Because Netflix isn't even buying all of Warner Bros. Discovery. Netflix is only buying the Warner Brothers TV and film studio and HBO and HBO Max streaming service. And all of Warner's IP that includes franchises like the DC superheroes like Superman and Batman. It includes Harry Potter, the Matrix, Game of Thrones, Sopranos, Friends. Warner's has a lot of big time ip. What Netflix isn't getting in this deal are all the cable networks that Warner Brothers Discovery owned. So channels like tnt, tbs, cnn, Discovery Channel, those channels are being spun out and into a separate company called Discovery Global before the Netflix deal closes. Netflix didn't want to get into the cable TV business because it's a declining business anyways. Revenues for that cable division was down 22% in the recent quarter. Now the initial reaction from Wall street wasn't great. Netflix Stock dropped around 3% the day this deal was announced. And there are a few reasons to be concerned. So let's talk about it. Why is Wall street concerned about this Netflix deal? Well, first of all, Netflix likely overpaid looking at Warner's movie and streaming division. It made $2.3 billion in EBITDA in the first nine months of this year. And Netflix expects them to make $3 billion next year. So that means that Netflix paid a 27 times EBITDA multiple to buy this business. That is way higher than the 11 times EBITDA multiple that other media giants like Disney and Paramount currently trade at. I mean, if Netflix really wanted to buy Warners, they should have done it when WBD stock was trading below $10. Buying it over $24 a share is just really expensive. And even looking beyond just the overpay, the other concern here is all the debt that Netflix now has to take on. See, Netflix doesn't have $70 billion in cash to pay for all this. In fact, they have less than $10 billion in cash on their balance sheet, according to their most recent earnings report. So Netflix is planning to raise $50 billion in new debt to do this deal. They're also taking on $11 billion of Warner's existing debt. So if this deal closes, Netflix will have over $75 billion in debt on their balance sheet. Now, to be fair, Netflix does generate a lot of cash. Their free cash flow was $2.6 billion in their most recent quarter. But it's still going to take years for them to pay off all of this debt. And then you have the opportunity costs of taking on all this debt. All the money that Netflix will spend on interest payments towards this debt is not going towards new content or sports rights or gaming. It just limits Netflix's flexibility. Plus, there is a legit concern on how beneficial it is for Netflix to buy Warners in the first place, since according to a lot of data, most HBO subscribers already subscribe to Netflix. So Netflix might not pick up many net new subscribers. And beyond just the money stuff, there's going to be a lot of headaches surrounding this deal. Lawmakers are already raising red flags. We're going to talk more about that in a bit. But that could result in Netflix executives spending a lot of time in court to defend this deal, which is time that they're not spending on growing Netflix's core business. And then you have the issue of integrating Warner's giant business into Netflix itself. You know, Netflix has never done a deal anywhere close to this big. And Netflix famously has a totally different culture than traditional Hollywood studios. You know, I showed that clip earlier of Netflix Co CEO Greg Peters saying back in October that Netflix are builders and not buyers. He also said that the track record for large media M&As haven't been so great. Well, he was asked about those comments in an investors call following the announcement of this deal. And he obviously walked back. Back. He said that Netflix buying Warners is different than AOL or AT&T buying Warners, because Netflix actually knows how to run an entertainment business. And while that is true, Netflix and Warner's do have a different business model, which could also be a problem. Netflix has historically been all about growing their streaming business and ignoring movie theaters. Warner's, on the other hand, is a typical old school Hollywood movie studio, releasing 12 to 15 movies a year. And some of them are major blockbusters like Superman and Batman. So Netflix might have to change their business model and embrace movie theaters. Or maybe they don't. I don't know. It's still unpredictable on how this is all going to play out. So either way, this deal raises a lot of questions and concerns for investors. But for some, the upside is definitely worth it. So let's talk about that now. There are a couple reasons to be excited about this deal, both as an investor, but also as a consumer. Netflix and Warner's combined would create an entertainment powerhouse with unprecedented scale and power, especially in streaming. Netflix is the largest streaming service in the world with 320 million global subscribers. And HBO Max is the third largest with over 128 million global subscribers. I mean, Netflix has already won the streaming wars, but this would really put a nail in the coffin because not only would it add to Netflix's scale, but it would keep Warner's away from Netflix's competitors like Paramount and Comcast. And that's going to make it pretty much impossible for any traditional Hollywood studio to compete with Netflix. And Netflix is already expecting this deal to result in $2 to $3 billion of annual cost savings by year three. Now, another key piece of this deal is the iconic IP from Warner Brothers and hbo. We talked about that. Netflix would become the owners of Harry Potter, the DC Superheroes, the Matrix, Game of Thrones, Sopranos. Pretty much everything that's ever come out of would belong to Netflix. Netflix points to the hit series Wednesday, which is based off the Addams Family ip, as a perfect example of how Netflix plans to leverage its new assets with spin offs. So I guess we can expect more Game of Thrones and Harry Potter spin offs if Netflix goes through with this deal. You know, one big advantage that Netflix has that other streaming giants don't is their place in culture and their existing scale and distribution. Netflix has the power to turn any show into a hit. I mean, they already kind of do that with existing shows. Suits became a summer since Sensation a couple years ago when it landed on Netflix. So Netflix says they have the chance to better monetize all the new assets. They're going to take over from Warner's. So if Netflix is able to make more money from this ip, that'll allow Netflix to make even better content which will attract even more subscribers. It'll reduce churn, it'll allow Netflix to raise prices which will make them even more money. And you can kind of see the business flywheel in action. And to me, the biggest bull case is the boost this could provide to Netflix's ad business. Now, ads are still a small but growing part of Netflix's overall revenue, and ads become a better and higher margin business with scale. If Netflix is able to provide premium content and keep people on their platforms for longer, that will allow Netflix to serve more ads and make more money. That's why I wouldn't be surprised if Netflix doesn't raise the price of their ads tier plan. And as for the movie theater stuff, I mean, who knows, maybe Netflix will figure out a successful movie theater strategy as well. In fact, we saw Netflix experiment with this already when they released a sing along edition of K Pop Demon Hunters in theaters, which ended up becoming the number one movie in the US for a weekend. So to me, that's the bull case for Netflix buying Warners. But the key question is how likely is it that this deal even closes because politicians and other Netflix rivals are already making some noise. So let's talk about that. Netflix seems to be pretty confident that this deal is going to close. In fact, they even agreed to a 5.8 billion billion breakup fee if this deal doesn't. Meaning they would have to pay Warner Brothers that much money if Netflix backs out or if regulators reject it. And I'm not going to lie, I'm kind of surprised that Netflix seems to be so confident because there are so many powerful forces that do not want this deal to happen. Everyone from regulators to Paramount to even Hollywood A listers are already starting to fight back. Lawmakers on both sides of the aisle have already raised red flags. Unsurprisingly, Senator Elizabeth Warren released a statement saying the deal looks like an anti monopoly nightmare that would force Americans into higher subscription prices and fewer choices. Democratic Congressman Ro Khanna also weighed in opposing this deal. He called out the risk this deal poses to movie theaters and also pointed out that more AI might be used in films. Then you have Republican Senator Mike Lee also jumping in saying this deal has a ton of red flags. So there seems to be bipartisan opposition regarding this deal. News of this deal on Friday also sparked backlash from Hollywood. An anonymous group of prominent film producers sent a letter to Congress saying that the combination of Netflix and Warner's would, quote, hold a noose around the theatrical marketplace. The concern here is that Netflix could destroy the theaters by eliminating or reducing the amount of time films spend in movie theaters before hitting the streaming platform. Now, Netflix has said they wouldn't do that, but most people are having a hard time believing them because they've spent the last decade or so talking bad about movie theaters and just focusing on their streaming platform. I think the key to pushing this deal through will depend on if Netflix can convince regulators that their market isn't just traditional media or Hollywood studios, but also include things like YouTube, Amazon, TikTok, video games, and everything that requires people's attention. Because that's ultimately the business that Netflix is in, right? They're trying to fight for people's attention. And if you zoom out and look at all the different content platforms and consider things like TikTok and Amazon prime and YouTube, it's a bit harder to argue that this deal would turn Netflix into a monopoly. But beyond just the regulators, the other wild card here is Paramount. They put in a $30 a share all cash deal to buy all of Warner Brothers Discovery, which included the movie studios, the streaming and also the cable channels. Now, Paramount is now led by David Ellison and he really needs this deal to get to a bigger scale to have even a shot at competing with Netflix. There are reports that Paramount could consider a hostile bid to buy Warner Brothers Discovery and might go straight to shareholders with an even higher bid than the $30 per share they submitted last week. So there is a lot of unknowns here. Netflix seems to think this deal will close in 12 to 18 months. I don't see how that's going to happen. Maybe Warner's knows this deal won't get approved from the regulators and they're just going to pocket the $5 billion breakup fee and then eventually merged with Paramount down the line. Anyways, you know, I'm still trying to figure out how I feel about this deal, not just as a Netflix shareholder, but also as a consumer. The joke that I made on Instagram this week was that the best part about Netflix buying HBO is that we're going to have one less streaming app to deal with, because I think we're all sick of how many streaming apps there are these days when it comes to content. Netflix swallowing HBO and having all that content live on the Netflix app seems like a good thing. But I'm still leaning more bearish about this deal, especially as an investor. Now I can see the upside for Netflix, the scale, the advertising business. But there is going to be so much drama and scrutiny surrounding this deal for the next 12 to 18 months. I mean, Netflix is going to face so much heat from regulators, politicians, Hollywood talent, that this is going to become a massive distraction for the company. And ultimately, I don't think that Netflix even had to do this deal. They have already won the streaming wars. There's a largest streamer in the world. They're the most profitable streamer in the world. Everyone under the age of 40 considers Netflix to be TV. So even if this deal for Warner somehow gets approved, it's going to burden Netflix with a ton of debt for years to come. But then again, Netflix has shown that they can pivot their business successfully from DVDs to streaming streaming to ads ads to sports, to live tv and now maybe movie theaters. Netflix has always been the underdog of Hollywood. They've been counted out so many times in their history that I almost don't want to bet against them. Whatever happens, though, regarding this deal, I hope to make a Netflix documentary about it someday. Well, all right, guys, that's it for today's weekend deep dive. Hope you guys enjoyed today's episode. If you did, let us know in the comments on Spotify or YouTube what you thought about today's deep dive and what your thoughts are on Netflix buying Warners both as an investor, but also as a consumer of content. And while you're at it, don't forget to hit us with a five star rating and vote in today's Spotify poll. All that engagement really does help us out, and it helps other people find the show. Thank you guys so much for listening, watching and commenting. Shout out to Mike and Connor for all the work behind the scenes and we'll see you guys back here tomorrow.