Wow, what a week at Spain.

And, uh, did I think yesterday when I completed my materials for the session that we would get overnight and agreed deal.

I certainly didn't. So this morning's been quite hectic.

Um, anyway, we are going to talk about the Warner Brothers, um, deal.

Um, 'cause you will have hopefully seen that, um, paramount and Warner Brothers are going to merge, or Paramount is going to acquire, um, Warner Brothers.

And, um, and I'm going to walk you initially through a couple of slides and then I'm gonna show you a financial analysis and hopefully you will find this useful.

Okay? Um, you can obviously ask some questions.

Um, I've got someone helping me with that and I will, um, if I see them on time, um, stop and answer them.

But, uh, but let's get started because we don't have much time.

So first of all, um, let's talk about big picture before I go into the deal.

What do shareholders actually want to know when we are announcing, when we are discussing a deal? So what are we as Spanker looking at in terms of, in terms of, um, transaction analysis? Obviously, number one is strategic rationale.

And um, and that is super important.

I'm not going to talk about that in this deal because obviously both Netflix and uh, paramount had had, um, slightly different, um, strategic strategic rationales.

And that's where we are really getting input from our clients.

But what we want to know as acquiring Shell is how much are we gonna pay, right? How much premium are we going to pay? And you will have seen that.

Um, last night the agreement was at $31 per share.

Um, the share price of uh, Warner Brothers pre deal, pre any rumors was $10.

So well done Warner shareholders, fantastic deal in terms of the premium.

What's the consideration? Am I gonna get cash? Am I gonna get shares? You know, a combination of the two.

The deal started very much with a combination from both sides and ended up as a pure cash deal.

Are there any conditions to closing? I'm gonna talk about regulations and uh, and regulatory approvals and how important those are in particularly these mega deals.

Are there potential interlopers, right? So if I'm buying a business and someone else wants to buy it, which exactly happened here, then maybe I might have to pay more to actually close the deal.

And think about it, we are now paying $31.

So again, well done to the Warner Brothers shareholders.

How is the transaction being financed? And that is particularly interesting in this transaction.

I'm going to show you, um, where the money is gonna come from.

What are the synergies, right? So we're paying a huge amount of money out.

What are we getting in return other than just the business? What type synergies can we achieve by putting these two companies together? Value creation, return on invested capital, net present value of synergies, what's happening to earnings per share? What's the impact on the share price? All of that.

I would like to know 'cause I'm holding Paramount shares, I'm going to add this huge asset to my company.

What is the impact on, on the company? Okay? Now, obviously really important is who's gonna run the business and has, how has this management actually got any experience in m and a? Because easy to agree a deal ultimately, but the really difficult bit is integrating the transaction and extracting those synergies.

Now, from the selling shareholder's perspective, slightly easier.

Again, strategic rationale, pretty important.

I want to know how much I'm gonna get, right? So again, Warner Bros, fantastic deal.

Um, and the consideration. And then I'd like to know a bit about timing, right? And when am I actually going to get the cash from Paramount? Um, can I sell my shares in the market, et cetera, right? So, so the acquiring shareholders, um, slightly, um, a longer list, um, because obviously we end up with the asset.

Okay? So now let's have a quick look at what a normal investor presentation might give us, right? So in an ideal world, and we haven't had this yet because obviously, you know, the deal's been ongoing for a couple of months, but there was a bit of a tit tattle between Netflix and, uh, and Paramount.

But you know, a very good investor presentation.

We'll talk about what happens to earnings per share because obviously it's an important measure for the share post via the PE ratio.

It will talk about synergies. Okay? So what type of synergies are we expecting? We do have an indication from Paramount.

We will talk about margins post deal.

It will talk about returns and cost of capital.

So return less capital versus wac, it will talk about how the deal is being financed.

And then a couple other things you can see in this transaction announcement. This is by the way, not paramount, um, Warner Brothers.

You can see, you know, what's happening to leverage. So if I'm using a lot of debt, what's the impact of the leveraged company going forward? Because obviously that has an impact on being able to raise additional capital in the future.

And also my credit rating, right? And you can see in this announcement they also talked about management and um, and identified, you know, they're really experienced in making acquisitions.

In case you want to know, the green box is from the Carlsburg Wick deal. And it's a fantastic announcement and it was really telling me as both buyer and selling shareholder, you know, what's actually going to happen in this deal.

Okay? So unfortunately we don't have this for, um, our deal. We're analyzing. Um, but this is what we would expect at some point in the future.

In more detail. I thought we'd talk a bit about the Warner timeline. The Warner timeline actually started, um, in December 24, um, when Warner Brothers Discovery decided that they were going to not make an offer for Paramount Global, which was the predecessor of, of, um, paramount Sky Dance.

Okay? So interesting that we are now the other way around.

Then in June 25, um, WBD um, finished a, um, a review of its business and decided that they were basically going to think about splitting the business and spinning off the global networks business.

The share price spiked intraday, but actually closed down 3% on the day, which is pretty important to remember because it would've been a very complex deal.

And debt levels, particularly for the networks business would've been pretty high networks. Think about, um, you know, CNN you know, television networks, et cetera. Discovery Channel pre deal, the share price of Warner was, uh, $10.

So this is where we are starting, and then you can see I've put two columns in here.

One is be Sky and one is Netflix and Paramount Sky Dance, um, basically offered for the entire business, whereas Netflix was only looking at the, at the streaming business, streaming and studios.

Okay, so where do we start? September, 2025, peace Sky makes the first offer $19 per share, 6% cash, 40% shares. It was rejected. That continues until, um, the company I Warner Process actually decides, um, in, uh, in October to, um, start a proper process, right? Because, uh, the, the, the offer from, um, peace Sky, I'm just gonna call them Peace Sky in Paramount kept going up.

But uh, in the end, you know, obviously management of Warner Brothers needs to make sure they get the best value for shareholders and started a proper process hired investment bankers.

And then about 13, um, potential buyers were, were, um, contacted by the bankers, um, including obviously Paramount.

Um, paramount put up a bit of a fight on the non-disclosure agreement, um, because they, for instance, wanted the right to require financial institutions to act exclusively for, for Paramount.

But they finally sign on the 10th of November, 2025.

So this is just, I now get access to more information regarding Warner Brothers.

Okay, now then we get two bits on the 20th of November, 2025.

So you can see, um, again, remember Paramount always bid for the whole business, whereas Netflix was only interested in the streaming and studio business.

Okay? So we get $25 50 from, from Paramount, 85% cash, 15% equity. So you can see already a much improved offer in terms of first all level.

And also in terms of um, um, con, um, consideration, IE cash Netflix at $27, which obviously is a lot higher because we are only bidding for the, um, streaming and studio business and 81% cash, 90% equity.

Then finally on December 4th, Netflix makes their offer $27 75.

At this point we still have an equity element.

And on December eight, um, paramount goes hostile all cash bid at $30.

They desperately wanted to get the business.

Now this story continues. There's an awful lot that happens in between and I just want to really focus on the numbers.

Um, in January, Warner finally recommends the bid by Netflix, right? The merger agreement is signed $27 75, including a $2.8 billion break fee in case the deal doesn't happen.

And then you will seen this week was very exciting.

We get another bit from Paramount $31 all cash, um, including improved financing.

And this was accepted overnight.

Um, I last night by Warner Brothers and Netflix has walked away.

So Netflix Base said we are not going to improve our offer.

We are sticking with 27 75 Warner Brothers, you know, has to take a superior bit because there are some shareholder laws in in the US and decide to join Paramount.

So that's the timeline of the deal.

Very exciting 'cause we have the hostile bit in there, you know, and obviously you can see how the price goes up. And remember we are comparing this to $10 per share pre deal.

Unbelievable, fantastic deal for Warner Shareholders. Okay? Now, um, I've dug around some information and in the merger agreement between Netflix and Warner, there's actually a fairness opinion published and I've put the link in here.

Um, it's in the SEC filing, um, fairness opinion basically means, um, that Warner asked Alan and Company and JP Morgan to assess the value, uh, you know, the offer they've received from Netflix.

Now, obviously, um, you know, this will have been also, um, been shared, you know, with Netflix itself, there's a lot of, um, information in that fairness opinion.

So if you're really interested in m and a, I would highly recommend you actually read through that because it's really interesting to see what information is made public at this point, which hasn't been in the public domain before.

I also have to say that my entire analysis is based on publicly available information only.

So you can see, um, those two companies, the banks, Alan Company and JP Morgan valued the two businesses separately.

So streaming and studios, that's what net Netflix wanted to buy.

And then the global networks business, which by the way is an absolute cash cow, but no growth.

Okay, so, so not a particularly exciting business, but fantastic cash flow to obviously then service debt.

And they've basically looked at the two businesses separately. You can see the multiples I've summarized, um, the fairness opinion and, and obviously, you know, the transaction analysis, the important one.

So if you remember, Netflix is offering $27 75.

Clearly the valuation of the two companies, you know, is, um, you know, if you, in the fairness opinion shows that $27 75 just for the streaming business is a very, very good price.

I've also put the um, DCF in there, um, which, um, I'm assuming, 'cause it's not stated explicitly, but we'll include the synergies.

Netflix assumed Netflix stated, um, publicly that they're expecting between two to $3 billion of synergies achieved by year three.

So you don't get to 3 billion per annum extra ebitda, um, in one go.

But it does take a couple of years to get to that total amount.

So effectively from year three onwards, you have 3 billion additional EBITDA compared to the two companies on their own.

Okay? So one plus one is more than two the networks business, you can see the no growth, um, multiples in there. So really low multiples, you know, the value itself, not not fantastic.

Um, but in total I've then made the combo in terms of, um, low and high and based on transactions we had between about $22 and $31.

So actually the $31, remember Paramount is offering for the entire company, the $31 seems to make sense just using this, um, this, um, fairness opinion.

And then also on the DCF, again, we are within that top end of the range, but again, Warner is a fantastic asset, you know, iconic, um, studios, et cetera.

So you would expect the value to be at the top end.

Yeah, plus we have competition for the asset.

So that's just in terms of what we can glean from publicly available information.

Now I mentioned early on I would talk about regulatory considerations.

Um, and remember again, you know, paramount buying the whole thing, Netflix, just studios and streaming.

One very big issue, which was raised from the beginning is that Netflix ultimately would have around 460 million subscribers on a global basis.

And that obviously is, um, somewhat an issue from a, from a monopoly perspective.

So we have US concerns, but we also have European concerns.

And because this is a mega deal, we are one of, we are the biggest streamer, um, in the world by that point.

It will go into monopoly, um, review.

So, um, um, paramount, um, started that process really early and HSR status HSR stands for hard. Scott Rodino Hard. Scott Rodino is the act under which, um, monopoly issues are basically, um, assessed in the us They started this really early and you can see their waiting period expired on the 19th of February, 2026 IE just about a week ago actually, exactly a week ago.

And that doesn't mean they've been approved, but they started this process much earlier, whereas Netflix never reached that point.

Okay? And obviously if you look at the press, um, over time of this deal, you know, there was always a little bit of a, you know, issue or challenge around, you know, will this deal get approved with Netflix because of this amazing dominant position in streaming.

Now in the eu, we haven't done anything yet, right? We, they started, um, the process in the EU takes a little bit longer in the EU and the EU be aware, can block the deal, okay? So whilst the US most likely will approve the deal, you know, we still could potentially have some conditions, um, from the European side, okay? Political angle, um, there was something on there as well.

Um, you know, it's interesting that yesterday, um, Netflix management was in the White House, um, you know, and, and you know, who knows what was discussed.

Um, but in the evening they pulled out of the deal.

So current outcome is once we pass the hotspot, we do know, um, wait, we still need a definitive, um, deal approval.

Okay? So, and obviously Netflix have said no, we're not gonna do this deal.

Um, we are walking away.

So press, I thought I just have a quick look at a couple of, uh, major newspapers around the world.

Now note I've generated this with ai, so I didn't actually read all the press articles.

Financial Time talks about, um, Warner Brothers being clinched by Paramount roughly $111 billion deal.

Um, $31 per share cash, bit higher price, full cash and broader protections.

So protections for whom, well protections for the Warner Brothers shareholders, right? So the Netflix free break free 2.8 billion will have to be covered by Paramount. There is a so-called ticking fee.

So basically if the deal does not close by the 30th of September, 2026, then on a, it's calculated on a daily basis, but it means on a quarterly basis I get another 25 cents per quarter effectively time value of money until the deal closes.

Okay? And, uh, so pretty important.

Um, so the Financial times called it richly priced but defensible and uh, and you know, we all knew that Paramount had to do a deal because they were sort of a relatively small company in, in the media sector.

Wall Street Journal, um, tells you pretty much the same thing.

Um, basically saying now we are out of it, but Netflix just obviously went up, um, quite a bit over in pre market trading and also now elsewhere trading and uh, and they're saying that Netflix is a more disciplined bidder and basically couldn't see additional value by um, increasing the bid, right? Remember two and a half, two to $3 billion of um, synergies.

And then I thought I have a look on the continent. So, um, I've just had it translated 'cause I dunno how many people if you, um, speak French, but basically it was an opportunistic deal for Netflix, but essential for Paramount.

However, extraordinary levels of debt and there is execution and failure risk, okay? So, so we need to just be a little bit aware of, we now have a huge amount of debt and we have a synergy assumption from Paramount's side of $6 billion more, I would say more than double of what Netflix was expecting, okay? And that obviously is a big number.

Now remember, paramount is buying the whole business, but again, the cash cow of the, of the network business is great, but there is no growth behind this.

Okay? So what we then wanted to do is have a quick look at some financials. So what I did is a typical, um, m and a analysis, okay? Hopefully you can all see my screen.

So we just dumped the, uh, dumped the data off the deal in there.

We've actually assumed that the deal will only close at the end of um, the year because we need to get all of these regulatory approvals. So we've assumed $31 25, which is that ticking fee, um, on top of the $31 cash being offered, okay? Have a look at the size of the deal.

We are looking at a deal of about 108 billion pre any fees, right? I mega deal, I love m and a, it's fantastic to see these big deals coming back, but obviously we have execution risk and we have a relatively small company paramount really absorbing an absolute monster transaction, right? So 24 billion standalone value and these are share prices as of closing, um, two days ago, okay? Then we made some assumptions. So there's not this fantastic press release in terms of the green box I showed you, but we do have some data which we found in the SEC filings since the beginning of all of these, um, discussions.

So we have synergies assumed by year five of 6 billion. There is no real detail on this in any of the filings.

Then we have debt financing which was mentioned in in in um, in the river offer of $31 or 57.5 billion.

And we have an equity backstop of 45.7 billion, which is the Allison Trust.

So think about Allison, um, is Oracle, right? So in there sit a ton of Oracle shares and there's an awful lot of um, value in those shares and there is a personal guarantee by Larry Allison who's the father of David Allison who runs Paramount, okay? We've assumed the cost of acquisition that of 6%, which might be slightly higher if we assume an investment grade rating.

So IG for investment grade, however, the company has said they are attempting to keep their investment grade rating. That for me is a really, really big question mark tax rate, we've assumed around 15%, um, because they obviously have some international operations advisory fees just standard and some debt financing fees. So my first question is, if I pay for all of this, so I have to pay for the shares that's 80 billion, okay, got my advisory fees, I need to pay the Netflix break fee of 2.8 billion and they have publicly stated that they will pay this.

Then we have some financing fees up to 1.5 billion which are a hangover from that potential split up of Warner Brothers discovery.

Then we have obviously the debt financing fees and we potentially have to refinance all of the net debt of um, Warner Brothers.

That gives me a total uses of funds of 113 billion, which is more than is committed at the moment, right? So I could not find any other indication of where the rest of the money is gonna come from. Maybe they have some other credit lines, maybe the Allison Trust is going to stump up some more that's just not been disclosed yet, right? But total source fund you can see an absolute mega deal. Fantastic. Had a look at relative pm US and EBITDA was, I'm not that worried about those 'cause they don't really tell me that much.

But then that's how we think about what we want to know what happens to earnings per share.

Okay? So we had to look at the facts estimates we focused on uh, 27 um, onwards, right? Because we are assuming the deal closed um, at the end of 2026 and then just did a quick performer um, income statement analysis.

So take p um, Paramount's, um, net income add what they're getting, I warn us net income, add the synergies post tax.

Now we know five years 6 billion so we, we don't know how to split them up, right? How quickly are you gonna get to 6 billion? So we've said 20% each year, okay, that might be completely wrong, but there has been no indication from the companies on what's going to happen here.

So this is really an assumption from our side.

Take off the interesting, uh, interest um, expense on the additional debt, which is uh, it's a big chunky number, okay? And this is obviously a tax deductible.

Um, and for me another really big question mark, what's the opportunity cost of the equity guarantee? Okay? Because obviously if I'm borrow money against the Oracle shares, I will have to pay some interest against that.

And there is an opportunity cost and we're not gonna do this for free.

So what is going to happen to this? But again, you know it difficult to make any assumptions so we kept it clean, we didn't include this performa net income gets negative first year.

I don't really care too much about the first year, but then year two and year three you can see we have quite a bit of EPS dilution.

So negative impact on EPS in the second year, but then in the third year it's picking up and the big thing is obviously those synergies and now the big question mark is where are those synergies going to come from, right? And uh, and this is where I really hope that management can make this work.

I then rerun the analysis and thought like let's have a look.

If we just take the average of Netflix stated synergies and assume they come in over three years, you still see a similar picture.

Much worse dilution obviously, but just about accretive in year three.

Okay? So the big focus will be on what is happening with synergies because obviously if I can't achieve those I am destroying value to the paramount shareholders, right? Because that will have just paid far too much.

But if we can, and I really hope they will then fantastic.

And this deal actually really does make sense.

We saw it from a valuation perspective with that um, fairness opinion that the $31 seems to be within a sensible range and it's not necessarily overpaying.

Okay? So that's EPS.

Secondly, I would quite like to know what happens to credit rating, right? Because we are taking on a ton of debt.

So what we did, we had a quick look at the numbers.

So we have obviously pcob and we've just done a very simple gross debt to EBITDA analysis.

You could obviously dive a lot deeper, but we just don't have enough information.

So it took EBITDA for Paramount plus what I'm getting Warner EBITDA. And you can see the numbers are nice and chunky. They're not growing dramatically.

'cause remember the underlying business of the networks business is not doing so well. It's a cash cow. Absolutely. So I get a big chunk of cash to repay the debt.

Um, I've added the synergies and that gives us a performer EBITDA for the, for, for the transaction.

So we started with uh, um, Paramount's debt, we add Warner's debt, um, and we add the acquisition debt and we get to the total debt.

So my debt to ebitda. So we kept that debt constant, assuming it's gonna be refinanced with bonds in the market across the different maturities.

We can see we are aging relatively quickly and compared to Paramount standalone, um, um, debt, um, leverage multiples, it's actually not that bad but it's a lot bigger.

Okay? So the big question is how the credit raging agencies are going to look at this.

Remember we assume 6% interest is slightly higher than what uh, paramount is paying at the moment.

And uh, and the rating is of paramount at the moment is triple B minus by standard reports.

The outlook is negative. Okay? So this is where I'm getting nervous.

IE it is a mountain of debt.

You will have to repay refinances at some point.

Number two, what's the opportunity cost of the equity guarantee? And number three, those synergies, right? So fingers cost management can really extract those synergies.

So what if we don't stay in western grade and we go sub investment grade level.

So we ran a quick sensitivity analysis and you can see just increasing the interest rates, what happens to EPS And it's starting to look, you know, not so great.

I mean we had that 53.9% um, at 6%, but obviously this EPS secretion does go down quite quickly if we are ending up in sub investing grade territory in terms of rating, okay? And uh, and that is a potential issue for the company or challenge let's say.

Um, but you know, let's see what happens on this one.

Okay, so we talked about is the deal fair in terms of valuation? Yep. We said we had a look at that.

Fairness opinion number two, we looked at EPS secretion. Dilution doesn't look too bad from year three onwards actually looks pretty good if they can achieve the synergies.

We looked at the debt ratings big question mark, but hopefully they will stay in the investment grade territory.

Now let's have a quick look at those synergies in a bit more detail, right? So what we did basically saying, let's have a look what the, what premium we're paying in dollars, okay? It's about nearly 200% premium, okay? But what premium are we paying in dollars? We are paying.

So remember pre any rumors we were at $10, the company was worth about $25.6 billion.

We are now offering $80 billion, which is what I calculated on the top.

And we are now looking at a premium paid of $54.5 billion.

Well done Warner Brothers shareholders as I keep saying right? Fantastic, fantastic deal for them.

Um, and uh, we basically said let's discount now the synergies in our assumption how they're going to fall.

And this is where we had to make an assumption and see how that compares to the premium we're paying.

Okay? So you can see we said every year we are achieving 20% more synergy.

So remember this means I'm cutting costs, increasing ebitda, however maybe through high subscription prices or more content and being sold.

Um, so every year I get more EBITDA until at the end of year five I get to that magic 6 billion.

Okay? So that means that will then continue.

We assumed no further growth of the 6 billion 'cause it is a chunky number particularly compared to what Netflix announced.

We then discounted that back eight point a half percent.

That gives me 11.4 billion.

I obviously have a terminal value.

So that's my 6 billion divided by my um, wac, okay? Which I have uh, forgotten to discount.

So I have actually got a mistake in here, so forgive me, I'm just going to very quickly change that because it was a bit fast, um, this morning after they changed deal 'cause I had done a huge amount of analysis on, um, on the um, Netflix deal and obviously had to pivot to Warner Brothers.

So my total synergies are worth 51 billion.

So I am within very close to what I'm paying as premium, okay? So I'm not necessarily destroying too much value. Hopefully I can even get more than 6 billion.

But remember my view that 6 billion is a very chunky number and hopefully they will actually achieve that as way above other media deals we have seen.

Okay? So we are sort of within range, you know, the 3 billion, you know, we also had a competitive bit so you will have to pay more.

So we're pretty much paying all of those, um, synergies away.

Now we then said let's have a look if synergies are less than that, right? So two and a half billion was my flaw compared to the Netflix deal and what if my whack actually, um, does deteriorate a little bit, you know, what's the sensitivity? I, how much am I giving away? So really ugly if I can only get to what Netflix is assuming, you know, I would actually give away 33,000,000,002 Warner Brothers shareholders, right? And I'm really destroying value for the Paramount shareholders.

So this whole synergy is a big, big question mark.

And then finally the last analysis.

Remember we mentioned at the beginning return on invested capitals. Now I can't unfortunately forecast five years 'cause I do not have EBIT and EBITDA forecasts for five years, which make any sense.

Um, because FactSet, you know, beyond year three, you know, there is so little input from from the research analyst that, uh, that we just ignored 'cause the quality of the numbers is terrible and we didn't want to put our own assumptions on top.

But you can see I'm spending 113 billion total because I'm also assuming the debt.

So I can either build something like Warner Brothers for 113 billion or by the company, okay? So 113 billion is my investor cap from the perspective of paramount.

What am I getting where I'm getting EBIT but I need to tax this 'cause the tax man will want to see some of that and I'm gonna get my post tax synergies.

So in total I get my normalized operating profit or notepad of 6.1 billion in year 2029.

And that will give me return vest capital of 5.4%.

Now if I'm saying that assuming the WAC is around eight, 8.5%, yes I'm below, but I'm only in year three, I'd love to see the development of this over the next, let's say two to five years beyond 2029.

'cause I'm pretty certain it will hit their cost of capital.

Okay? So we are seeing a positive development, but year three years is a little bit too short.

We should really look at five to potentially 10 years.

So if I just summarize right, the deal seems to make sense.

Let me just go back, um, to my slide here.

The deal seems to make sense from a valuation perspective.

Actually what I'm gonna do is I'm gonna go back to this slide because the, the, the val fairness opinion does support the $31.

Okay? Secondly, um, the, uh, syner, the, the, the um, net person value synergies isn't too far away from the premium page.

Remember it's a competitive bit, it's a unique asset.

You know, we don't have a lot of these type of companies um, floating around.

Um, so that's pretty good as well.

Um, we have a bit of an issue or challenge regarding the synergy.

So let's watch out over the next couple of years what's gonna happen there.

And then the other big question is the funding of the deal and the impact on leverage and credit rating.

Okay? But from a valuation perspective the deal doesn't look too bad, particularly 'cause it was competitive.

So hopefully that's given you a really good idea on how we look at transactions actually using a life deal, right? Which changed overnight.

And as I can only say again, is congratulations to the shareholders of Warner Brothers because um, it is a phenomenal valuation of the company and good luck to paramount extracting those synergies, fingers crossed to management that they can, can really achieve this.

Now that concludes our LinkedIn life.

I hope you found it useful.

Thank you very much for attending and see you soon on our next LinkedIn life.

Thank you.