Paramount Says Its Warner Bros. Offer Beats Netflix Deal. It Comes Down to This Number.

Warner Bros. Discovery is selling its film and TV production business, plus HBO and HBO Max, to Netflix for $83 billion, including debt. (Mario Tama/Getty Images)

Netflix is paying billions for Warner Bros.’ film and streaming business, but it’s the value of the company’s left out cable networks that could end up being a crucial issue in getting the merger done.

Warner Bros. Discovery is selling its film and TV production business, plus HBO and HBO Max, to Netflix for $82.7 billion, including debt. The equity value of the deal is $72 billion.

Under the deal reached Friday, Netflix said it would pay $27.75 a share for the Warner businesses, comprised of $23.25 a share in cash and $4.50 in Netflix stock. The cable networks, including TNT, TBS, CNN, and Discovery, aren’t included in the deal and are set to be spun off in a separate company called Discovery Global by the third quarter of next year.

Paramount Skydance said Monday morning that it was taking a rival cash offer of $30 a share directly to shareholders. Paramount’s offer includes all of Warner Bros. Discovery, including the cable channels.

Warner Bros. Discovery hasn’t said what the Discovery business is worth, but the calculation becomes increasingly important now that there is a competing bid for the company.

On Monday, Paramount said its offer “provides superior value, and a more certain and quicker path to completion.”

The value of Discovery Global is the wild card in that analysis.

So what is Discovery Global worth? Barron’s puts the value at about $4 per Warner Bros. share, which would make the Netflix offer superior. By our estimate, the total Netflix package would be worth close to $32 a share—$27.75 plus $4.

But Paramount and others could quibble with that math. The cable business is in decline due to cord-cutting and the demographic pressures facing cable TV audiences. And Warner Bros. hasn’t disclosed the amount of debt that the new cable company will carry.

Discovery Global is expected to generate more than $6 billion of Ebitda (earnings before interest taxes, depreciation and amortization) in 2025, falling to about $5.6 billion in 2026, based on recent estimates for the Warner Bros. cable businesses from Citi analyst Jason Bazinet.

Investors tend to pay a low multiple for shrinking businesses and Wall Street analysts have assigned a valuation of four to five times Ebitda. A multiple of five would be about half that of Disney and Paramount.

At five times estimated 2026 Ebitda, Discovery Global might be worth around $28 billion.

Discovery Global would have an equity value around $10 billon after factoring in debt, Barron’s estimates. That would give Discovery Global a per-share value of $4, based on 2.5 billion shares outstanding.

Using a four multiple would bring the equity value closer to $2 a share, buttressing the case for Paramount.

The above analysis is based on the new Discovery Global having $18 billion in debt. (The number hasn’t been determined, but Warner Bros. Discovery is expected to end 2025 with about $29 billion of net debt, and Netflix has said it would assume $11 billion worth of debt in its deal.)

This is the math that Wall Street bankers are doing right now. Warner Bros. Discovery shareholders may soon have to make their own calculation.

Write to Andrew Bary at andrew.bary@barrons.com