Netflix (NFLX) just made a move that could completely reshape Hollywood...
The streaming giant announced last week that it entered into exclusive talks with Warner Bros. Discovery (WBD) to acquire its film and TV studios, along with its HBO Max streaming service.
This comes just a few years after WarnerMedia and Discovery merged (forming Warner Bros. Discovery)... a union which, frankly, was a disaster.
Warner Bros. shares fell as much as 71% after the two entertainment giants merged in 2022. And the stock only started rallying again once the business promised to split up.
Netflix's offer values Warner Bros. at $72 billion. And it agreed to a $5 billion breakup fee if regulators block the deal. That's a sure sign the streaming company means business.
Of course, the acquisition is far from a done deal. Earlier this week, television and streaming giant Paramount Skydance (PSKY) launched a hostile takeover bid for Warner Bros.
However, Netflix still seems confident it'll win... And today, we'll show why its latest move may be one of the most strategically sound and undervalued power plays in recent history.
Netflix is isolating the strongest part of Warner Bros. and leaving the rest behind...
As noted, the company would inherit Warner Bros.' studios and its HBO network.
HBO has built a reputation for producing hit shows like The Sopranos, The White Lotus, and Game of Thrones. Meanwhile, Warner Bros.' Hollywood studios sit behind major franchises such as Harry Potter and Friends.
These libraries have huge long-term value, as they consistently draw millions of viewers.
The acquisition, according to Netflix, will lead to an even broader audience for both companies, better offerings, and more licensing opportunities.
What Netflix won't be inheriting are the parts of Warner Bros. that have been losing money...
Warner Bros. plans to spin off its cable networks, such as CNN, TNT, and TBS, before the transaction.
The traditional TV segment has been a major drag on performance. It reported a 23% revenue decline in the most recent quarter as viewers continued to move away from cable.
In short, the Netflix-Warner Bros. deal is focused on assets that still generate money and will keep subscribers attached to their platforms.
Netflix isn't targeting Warner Bros. for the same reasons Discovery did…
Discovery, prior to its merger with WarnerMedia, was predominantly a live television conglomerate. It owned several TV channels, including its namesake Discovery Channel and Food Network.
These channels have struggled to keep up as folks cancel their cable subscriptions in favor of streaming.
Netflix, on the other hand, is already the largest streaming platform on the planet... Now, it's trying to add a world-class studio business to the mix.
To understand why this is such a big deal, it helps to look at Warner Bros.' past profitability when it was a standalone business.
Again, WarnerMedia officially merged with Discovery in 2022. Prior to that, since 2018, it had been owned by AT&T (T). That means we need to look at 2017 and earlier.
And as you can see below, the standalone business had very strong profitability.
From 2014 through 2017 (the last period it was its own business), the company earned a Uniform return on assets ("ROA") between 23% and 30%... well above the 12% corporate average.
Its HBO network and Hollywood studios drove all of this performance... and if all goes to plan, Netflix will soon own those assets.
Netflix has built a powerful franchise of its own. Its Uniform ROA climbed above 30% in 2018, though it has since come down to an average of roughly 23% over the past few years.
The streaming field has gotten fierce. And this is its chance to completely blow the competition out of the water.
A larger library increases engagement without increasing overhead. As Netflix already has the largest streaming platform, this deal could ensure it has enough content to keep folks engaged for years to come.
Investors may not realize how much value this potential acquisition holds...
Discovery tried to cover up its dying operation with a great one... Netflix is looking to combine two healthy businesses into a juggernaut.
If regulators approve the deal, it will pair the world's leading streaming service with some of the most valuable content ever created.
The assets that once drove Warner Bros.' strong returns will no longer be tied to a structure that has been losing relevance.
And while Warner Bros.' stock has been floundering since it merged with Discovery, Netflix used that to its advantage. It stands to get some extremely valuable intellectual property for a sweet deal.
Regards,
Joel Litman
December 11, 2025
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