David Ellison's Mixed Week: A Bid Refusal and New Opportunities

In the most recent developments involving Paramount Skydance CEO David Ellison, Warner Bros. Discovery (WBD) has declined his eighth offer to acquire the entirety of its assets. This setback for Ellison comes amidst strengthened arguments for his bid compared to Netflix's proposal, supported by the latest events in the cable market.

Versant, a cable network entity that recently spun off from Comcast, debuted weakly on the public markets. This faltering performance played to Ellison's advantage as he continues to argue the superiority of his offer over Netflix's. As WBD turned down Paramount's $30-per-share all-cash proposition for all of its assets—including its valuable cable networks—in favor of Netflix's bid, Ellison's stance finds unexpected echoes. Netflix has proposed buying only WBD's studio and streaming ventures for $27.75 per share in a mixed payment of cash and stock.

Evaluating the Worth of WBD's Cable Networks

A vital aspect to consider when comparing these bids is the worth of WBD's cable television networks. With a $2.25 per share gap between Paramount's offer for the complete business and Netflix's exclusion of the networks, the perceived value of these assets is paramount. If these networks can command at least $2.25 per share, the Netflix bid seems obvious. Should they hold a lesser valuation, however, Paramount’s comprehensive $30-per-share offer becomes more appealing.

Interestingly, this scenario gives Paramount a motivation to underplay the value of the networks they seek to acquire, while it suits Netflix to extol the virtues of assets they are not pursuing. In its rejection communication, WBD underscored a few drawbacks in Paramount's bid, like added expenses from a $2.8 billion breakup fee payable to Netflix and additional financing costs totaling $4.7 billion, translating to an effective reduction of $1.79 per share from Paramount's price. These considerations add layers to the shareholders' evaluations.

The Versant Comparison

For context, media analysts are drawing comparisons with Versant, which opened to trading shortly before these discussions. In the few days since going public, Versant's shares have decreased by roughly 25%, plummeting from an initial $45.17 to $33.80. Factors contributing to this decline include large fund managers offloading Versant shares due to constraints with holding Comcast shares.

Currently valued under $5 billion, Versant’s enterprise value, inclusive of $2.25 billion in debt, renders an enterprise value to EBITDA ratio of 3.8x. This is notably lower than the typical multiples seen among top companies in the S&P 500, hinting at a reduced market interest for cable assets—an unfavorable sign for WBD's cable holdings like CNN, TNT, and HGTV.

If WBD's network division were appraised by the same 3.8x benchmark, it might only fetch $1.20 per share as per MoffettNathanson's future projections. This suggested valuation supports Paramount's argument to WBD shareholders, positioning their bid favorably against Netflix’s.

Comparing Two Different Entities

Ellison should remain cautious though, as Versant and WBD's cable network segments aren’t perfectly comparable. Despite shared ownership of cable channels, WBD's assortment—which encompasses CNN and major sporting rights such as the NHL and college basketball—is typically perceived as more valuable than Versant's offerings. Additionally, WBD holds a heftier debt load, which complicates straightforward comparisons.

WBD has dismissed equivalences between its operations and Versant's, highlighting instead its superior scale, profits, and expansive global presence alongside lucrative ventures like Discovery+. According to Rich Greenfield of Lightshed Partners, WBD's cable assets inherently command higher worth, emphasizing potential resale value or business reorganization post-separation.

Without convincing shareholders of the attractiveness and security of its $30-per-share bid, Paramount faces the possibility of amplifying its proposal to outmaneuver Netflix, potentially escalating into a contested bidding scenario.