Too Much TV: Unpacking The Details Of The Netflix/WBD Deal (And No, Netflix Isn't Paying $83 Billion)

There is so much haphazard reporting around this deal

It is tacky for a journalist to spend a lot of time talking about how correct their reporting has been when it comes to a subject they cover on a regular basis.

But if I was looking for a textbook example of why you should support independent journalism - and specifically my independent journalism - the recently announced Netflix deal to acquire the studio and streaming assets of Warner Bros. Discovery is a good place to start.

I have been writing for weeks that this was the likely outcome, and that coverage included exclusive conversations with Netflix executives, as well as detailed rundowns of the challenges in making the deal happen.

And it turned out that not only has my reporting been correct, I was nearly alone in my reporting of the facts. It was an unpopular position to take, but I’m proud to be able to say that most of my higher-profile fellow media reporters missed the complete story.

Since the deal was announced very early Friday morning, I have been working the phones and email trying to parse out the details of the acquisition. That also includes trying to make sense of the 377-page 8K filing, which lays out a staggering number of details, from stock options to how long the respective companies have to continue to retain control of unused web site domains.

There is a lot to work through, and I have been getting help from a few lawyers and MA experts in an effort to get a better handle on the parameters of the acquisition.

But it has been EXTREMELY frustrating to see so much reporting that misunderstands even the most basic details of the acquisition.

For instance, here is the top story about the deal on Deadline:

Except…..it’s not an $82.7 billion deal for Netflix. That total is the entire valuation of Warner Bros. Discovery under the terms of the proposed deal. But the parts that Netflix is actually acquiring - roughly, the studios, HBO/HBO Max and the WB lot - are valued at around $72 billion. The difference between the two numbers represents the value of the remaining WBD assets.

To make things even more complicated, the number Netflix will ultimately pay is likely to change a bit, because under the terms of the merger, the final cost will change a bit due to other factors, including the respective stock prices of both companies at the time of the deal closing, as well as things such as how the existing WBD debt is allocated and valued. But regardless, if you are reporting that Netflix is paying $82 billion for some Warner Bros assets, you are making a very basic mistake about the parameters of the story.

There was just an astounding amount of bad reporting today, much of it apparently motivated less by facts than by feels.

Anti-monopolist Matt Stoller was weighing in on the deal at everywhere from The Ankler to CNBC on Friday. And yet he made arguments that were based more on his overall premise that all consolidation is bad rather than anything Netflix might do in the future:

Netflix is the number one streamer, and would be buying the number three streamer. It would also be buying a large and important content library, which would presumably then be unavailable for potential rival streaming services.

To be clear, there is absolutely no indication Netflix would shut down the WB content licensing business to other streamers. Not only have Netflix executives said that it won’t happen, the Warner Bros. content licensing business is a big revenue generator. And much of that revenue is driven by licensing older titles that would have limited value for either Netflix or HBO Max. But saying things like this makes the deal sound scarier.

Look, this is an extremely complicated deal and it is going to take some time to figure out all of the details. And I am the first to admit that I am learning as I go.

As an example, back in November I wrote about the challenges Paramount Skydance would face in its attempt to acquire Warner Bros. Discovery and I unpacked a financial move that Davis Zaslav and John Malone had used when they merged Discovery Communications with a much larger Warner Media:

David Zaslav has been touting his plan to split the company in half. One part holds the studio, streaming business, and some other assets. The second part holds the linear channels, sports assets, and a few other assets. So why is he so intent on selling the company in pieces?

Look for further than the deal that he and chief investment advisor John Malone made to obtain Warner Brothers from AT&T. The deal was structured as what is called a “Reverse Morris Trust,” a transaction that has been rarely used in the media business. In most mergers, the larger company acquires a smaller company. But in a Morris Reverse Trust, the larger company spins off some assets, and that’s immediately followed by a prearranged merger with another business.

One advantage of this approach is that, as long as it’s structured a certain way, it eliminates the majority of the tax burden on the seller. In this case, people with large amounts of shares, such as Zaslav or Malone. There are some restrictions. To dodge the taxes, the selling company has to retain a majority of the shares in the spin-off for a set amount of time in order to prove there was no attempt to dodge capital gains taxes. The selling company also technically runs the spin-off company, although in the case of AT&T, it simply agreed to let Zaslav essentially head the company.

The Reverse Morris Trust that made Warner Bros. Discovery possible has now expired, and Zaslav and Malone could use the same procedure to spin off the troublesome parts of WBD. And if they really wanted to make the deal more palatable, they could reverse plans and send CNN to the spin-off company along with other linear TV assets.

One reason I think this is a possibility is this passage from the press release WBD sent out two days ago, officially announcing they were for sale:

As part of the review, the Company will also consider an alternative separation structure that would enable a merger of Warner Bros. and spin-off of Discovery Global to our shareholders.

Which sounds a lot like the description of a Reverse Morris Trust deal to me.

So why do it this way? A Discovery Global spin-off, combined with CNN, TNT, TBS, and TruTV would create a solid linear business in the United States as well as a solid sports platform here and globally. And under the structure of the Reverse Morris Trust, current WBD shareholders would benefit from any success that comes from the spun-off company. Which would most likely be owned by a collection of hedge funds or other large financial institutions.

The split would also create a studio division that Netflix in particular, would find very attractive. Stripped of WBD’s linear business, it’s not a crazy idea to see that Netflix would be very interested in that half of the company. This would also be a much cheaper option than acquiring the entirety of WBD.

And that seems to be what is happening in this Netflix/Warner Bros. Discovery deal.

The entertainment news headlines are highlighting “Netflix Buys WB Studios & Streaming,” but the truth is that the process is a lot more complicated than that.

According to the merger filing, Netflix (”Netflix”) and a newly created subsidiary owned by Netflix entitled Nightingale Sub (”Merger Sub”) have entered into an agreement with Warner Bros. Discovery Inc (”WBD”) and New Topco 25 Inc (”Newco”), a newly formed and wholly owned subsidiary of WBD.

Under the terms of the Merger plan, a newly formed Delaware corporation and wholly owned subsidiary of Newco will merge with and into WBD (the “Holdco Merger”) with WBD surviving as a wholly owned subsidiary of Newco and with the stockholders of WBD becoming the stockholders of Newco.

There will then be an internal reorganization and separation and distribution of WBD’s Global Linear Networks business and certain other assets and as a result of which WBD will hold the Streaming & Studios businesses of WBD (the “Retained Business”), Merger Sub will merge with and into WBD, with WBD surviving as a wholly owned subsidiary of Netflix (the “Merger”).

In other words, Warner Bros. Discovery will be acquired by a wholly owned subsidiary, the parts Netflix wants will be transferred into WBD, which will then be sold to a wholly-owned Netflix subsidiary called Nightingale Sub (“Merger Sub”). The remaining assets of the current Warner Bros. Discovery (the linear networks, international business, etc) will remain with this new Newco.

Why make this so complicated? The short answer is taxes. It saves the respective corporations untold millions of dollars it would otherwise have to pay under a traditional merger. And it allows WBD to shift current stock compensation deals currently due employees such as David Zaslav around in a way that will shield them from much of their tax burden.

One reason why I am being critical of a lot of the reporting about this deal is that as the passage above illustrates, this deal is big and complicated. And if you don’t work hard to understand the parameters of the deal, you aren’t doing your readers any favors.

But even when you try your best, deals like this can be confusing. Even when it comes to basic details. After Friday morning’s conference call with investors, I reached out to someone at Netflix about the fate of TCM, which David Zaslav had said would remain with Warner Bros. Studios when WBD was split in half. And that point was reiterated later in the day, during a conference call between WBD executives and company management.

And yet, I was sent this tweet, which offers up a different result. And it is coming from Robert Gibbs, Head of Communications of WBD, so presumably he would know. But then, so should a Netflix communications person.

TBH, it’s difficult to see why Netflix would keep TCM, unless they decide to shut down the linear business and roll out some stand-alone streamer. Netflix doesn’t have any other linear channels & carriage negotiations would be challenging. TCM had struggled with carriage issues in normal circumstances, with the weight of the WBD linear business behind it. But at this point, I am not sure about what is happening.

And that is the case right now with a lot of random questions about the deal.

For instance, a Netflix spokesman today said that as part of the deal, the streamer is acquiring Warner Bros. Games, which is one half of the Warner Bros. Discovery Global Consumer Products division. The other half of the division is Warner Brothers Discovery Publications, which owns print titles such as DC Comics and Mad Magazine. That same spokesperson said Netflix wasn’t interested in that part of the business, and it certainly isn’t a moneymaker. I would assume DC Comics might own IP Netflix would be interested in owning. But like many other things about this deal, I just am not sure.

And that is my advice for anyone trying to follow the twists and turns of this deal. Trust the reporters who are willing to admit they don’t know everything. Because even company insiders are often confused.