Wall Street is bullish on Netflix walking away from WBD deal

When Netflix (NFLX) shockingly backed out of its deal with Warner Brothers Discovery (WBD) last week, co-founders Ted Sarandos and Greg Peters said in a statement that the agreement it had reached with Warner Bros. "would have created shareholder value with a clear path to regulatory approval."

Warner Bros. had initially accepted Netflix's offer of $82.7 billion, which would've been paid through a mix of stock and cash. The transaction was valued at $27.75 per WBD share.

But when Paramount Skydance Corporation (PSKY) raised its bid to $110 billion, or $31 per share - which WBD's board officially declared to be a "Superior Proposal" - Netflix refused to make a counter-offer.

In their statement announcing that they were walking away from the deal, Sarandos and Peters noted that "we’ve always been disciplined, and at the price required to match Paramount Skydance’s latest offer, the deal is no longer financially attractive, so we are declining to match the Paramount Skydance bid."

They added that the "transaction was always a ‘nice to have’ at the right price, not a ‘must have’ at any price."

Netflix will instead invest about $20 billion in expanding its entertainment offering through movies and streaming shows, with Sarandos and Peters saying that its business "is healthy, strong and growing organically, powered by our slate and best-in-class streaming service."

NFLX shares rose 10% after the company opted not to try and match Paramount's offer.

And now Wall Street appears to be cheering Netflix's decision to end its pursuit of Warner Bros.

JPMorgan upgraded Netflix to Overweight from Neutral on Monday, calling the company a "healthy organic growth story ," while citing its global subscriber growth, strong content and continued pricing power.

Barclays on Monday reinstated coverage with an Equalweight rating and a price target of $115, with analyst Kannan Venkateshwar noting that "we considered Netflix's bid for WBD an unnecessary distraction," adding "we welcome the company's decision to walk away from the deal."

While Barclays thinks Netflix made the right decision, Venkateshwar pointed out that its engagement in a deal for WBD could influence how investors value the company.

"However, despite the understandable early positive market reaction to the decision, we suspect the fact the company decided to consider a deal of this magnitude is likely to anchor the valuation narrative for some time," Venkateshwar said.

He points out that Netflix had a "desire to scale content intellectual property by buying franchises at Warner Bros."

And now the company's pursuit of WBD will lead to a debate "about why Netflix felt the need to add these capabilities and this debate, rightly or wrongly, will be framed by the weak engagement growth at the service."

Meanwhile, Bernstein analyst Laurent Yoon called it a "win-win-win outcome" for Netflix, Warner Bros. and Paramount.

For Netflix, "the deal overhang disappears - at least for now - and management can refocus on what drives their business," which is its price, quantity and margin fundamentals, according to Yoon.

"That formula has worked, and we believe it will continue to work," he said.