Regulatory path between WBD and Paramount could be easier than the Netflix tie-up

One day later Paramount Skydance emerged victorious from the acquisition of another media giant Discovery of Warner Bros.Questions are growing about the path forward for corporate regulation.

WBD’s board of directors said Thursday that Paramount’s revised offer of $31 per share was higher than an existing offer of Netflixprompting the streamer to announce that it was pulling out of the deal completely and clearing the way for Paramount.

Paramount’s increased offer – up from $30 per share – was the latest in a series of moves after it launched a hostile bid late last year to buy WBD. It initially lost in a bidding war to Netflix, which offered $27.75 per share.

Paramount’s latest offer also included a $7 billion breakup fee if the deal doesn’t gain regulatory approval. And according to a filing Friday, the company has already paid the $2.8 billion breakup fee that WBD owed Netflix if the deal fell through.

But media industry experts say it seems more likely that the Paramount deal will pass government scrutiny than when Netflix was present.

Netflix co-CEOs Ted Sarandos and Greg Peters said Thursday that it was “no longer financially attractive” to match Paramount’s increased offer.

Although Netflix executives said they were “highly confident” their deal would be approved, the merger would have brought together two major streaming services – Netflix and Paramount+ – and could have potentially raised prices for consumers and lessened competition.

In early December, Trump said the Netflix-WBD deal “could be a problem” because of the increased market share Netflix would gain, saying he would be involved. He walked back those comments earlier this month, saying the deal would be at the sole discretion of the Justice Department.

And even if the size of the combined Netflix and WBD entity was one of the companies’ biggest antitrust hurdles, that question could still be raised for Paramount.

Both Paramount and WBD have a large portfolio of television networks, in addition to Paramount+ reaching 78.9 million subscribers, according to its latest earnings report, and HBO Max boasting 131.6 million subscribers through the end of 2025.

Paramount executives argued that one advantage of their offer was that a deal with the media company would attract less government attention. The father of Paramount Skydance CEO David Ellison Oracle co-founder Larry Ellison, is known to have a close relationship with President Donald Trump.

Trump’s son-in-law Jared Kushner supports the deal with Paramount, according to a filing with the Securities and Exchange Commission.

However, Paramount’s proposed deal had been criticized because it was potentially financed by Saudi Arabia’s sovereign wealth funds; Abu Dhabi, United Arab Emirates; and Qatar. The company previously said these entities agreed to waive all governance rights, including representation on the board of directors.

California Attorney General Rob Bonta, a Democrat, warned late Thursday that the merger was “not a done deal” and that the California Department of Justice, which has opened an investigation into the deal, would be vigorous in its review.

And Democratic Sen. Elizabeth Warren of Massachusetts said in a statement that the Paramount and WBD merger is “an antitrust disaster threatening higher prices and fewer choices for American families.”

Analysts at Raymond James said they believe the Paramount-WBD deal could pose far less risk to regulatory approval than a tie-up with Netflix.

In a Friday note, analysts said the regulatory path ahead for Paramount is “significantly easier” than Netflix’s, although it would not be “a breeze.”

“Of course, this deal presents new challenges in news, cable networks, international linear networks, etc., but we still believe the WBD/PSKY deal is more acceptable,” the analysts wrote. “And, particularly following the reaction to the WBD/NFLX deal, we believe PSKY’s political standing with the current US administration is much stronger than Netflix’s.”

Analysts noted that questions remain about how the competitive market for the companies will be defined by the DOJ, and they speculated that Netflix likely decided not to match Paramount’s superior offer due to what was “likely a brutal regulatory review.”

A note released Friday by Morningstar analysts echoed those thoughts. Analysts said the move was good for Netflix and Paramount because they felt Netflix was unnecessarily overpaying for WBD’s streaming and studios.

Notably, Paramount aimed to purchase all of WBD, including its pay TV networks, such as CNN, TBS and TNT, while Netflix only wanted the company’s studios and streaming assets.

“This is the best outcome for Warner shareholders, in our view, because we believe that, with a higher probability of rapid regulatory approval and the uncertainty surrounding the value and risk of the network business they would have retained, the best offer would have been $30 in cash,” the analysts wrote.

Analysts added that they do not expect Paramount to face any regulatory issues during the approval process.

Joseph Kalmenovitz, an assistant professor of finance at the University of Rochester’s Simon Business School, said Paramount’s timing of the offering was likely strategic.

“David Ellison didn’t just outsmart a Hollywood board: he timed the regulatory cycle perfectly,” Kalmenovitz said. “The populist philosophy of great is evil is over; the pro-deal establishment is back.”

Still, Paren Knadjian, a partner at consulting firm EisnerAmper, said the regulatory path forward for Paramount remains nuanced and not a done deal. While concerns about the Netflix-WBD deal focused largely on library content, the Paramount-WBD deal is much more of a “horizontal consolidation” effort between cable TV, sports, streaming and news, he said.

“I think the most important thing we’re going to focus on is the concentration of intellectual property under one roof,” Knadjian told CNBC. “What power does that give this new entity in terms of being able to charge more?”

Knadjian said Paramount will also face political concerns, not only from state and federal politicians but also between CNN and CBS under one roof, in addition to concerns about blockbuster franchises like “Star Trek” and “Harry Potter.”

Ultimately, approval of the deal will depend on what concessions both companies have to make to allay fears about a possible media monopoly.

“Regulatory pressure, political pressure, these are things that are certainly going to delay the deal and make it more complicated, and I think there are going to have to be significant concessions made to get it done.

There are so many factors to this. It’s a lot more complicated than most other deals we’ve seen in the past,” Knadjian said.

– CNBC’s Lillian Rizzo contributed to this report.