Netflix(NASDAQ: NFLX) pioneered the media industry when it launched its streaming service in 2007. Suddenly, video and DVD rentals were a thing of the past.
Fast forward to today, and Netflix is a leading global streaming service, though there’s competition around seemingly every corner. Netflix has now begun to reinvent itself again. However, this time, the streaming giant wants to expand its content empire in a blockbuster acquisition of Warner Bros. Discovery.
But nothing is simple. One of Netflix’s archrivals is attempting to beat the streaming giant to the punch with a hostile takeover. Netflix stock has declined since the company initially announced the deal had been agreed to.
Is Netflix’s ambitious deal good for investors, and will the stock head higher? Here is what you need to know.
Image source: Netflix.
The company recently announced a deal to acquire strategic assets from Warner Bros. Discovery, including its film and television studios, as well as HBO and the HBO Max streaming service. It’s a substantial deal, with an enterprise value of approximately $82.7 billion.
Netflix had been in a bidding war with Paramount Skydance over Warner Bros. Discovery. Following Netflix’s announcement of its acquisition agreement, Paramount Skydance announced their plans to attempt a hostile takeover by presenting an all-cash offer directly to Warner Bros. Discovery’s shareholders worth $30 per share, valuing the proposal at an enterprise value of $108.4 billion.
There are numerous moving parts here.
First, Netflix and Warner Bros. Discovery have agreed to a deal. There are fees if the merger doesn’t go through. Additionally, the deal is highly public and has already sparked regulatory scrutiny among politicians, who have called it anticompetitive.
Only time will tell what ultimately happens here, but it’s helpful to evaluate the two most likely outcomes. Warner Bros. Discovery wants to sell, so it seems that a deal will eventually proceed with one suitor or another.
If Netflix does close the acquisition, it would gain a vast array of intellectual property, including Game of Thrones, the Harry Potter franchise, and numerous other movies and shows. Netflix announced its plans to keep HBO Max separate from Netflix’s core streaming services, but it could grow HBO Max by promoting it to its existing 300 million-plus subscribers.
If Paramount Skydance wins out, it puts the company on a more level playing field with Netflix and the industry’s other power players, including Walt Disney, which owns multiple services, as well as Alphabet, which owns YouTube and YouTube TV.
Netflix’s ultimate goal is to further entrench its competitive moat. Brands and franchises take time to develop. Netflix has steadily invested in successful assets, such as Stranger Things, but would benefit tremendously by inserting Harry Potter and other well-known content directly into its portfolio.
Despite the strategic benefits, Netflix’s stock has declined since the deal. Why?
That is most likely due to the massive price Netflix is paying. Netflix’s balance sheet would have as much as $75 billion in debt following the acquisition, nearly 3 times its earnings before interest, taxes, depreciation, and amortization (EBITDA) over the past four quarters. That means Netflix would spend years devoting a sizable portion of its cash flow to paying down that debt.
While that could weigh on the company’s short-term financial performance, it would give Netflix a stronger foundation in a consolidating streaming industry. Netflix has steadily become more profitable as it grows larger, which means the company might print even more profits once it digests all that debt.
Netflix now trades 30% off its all-time high. At a price-to-earnings ratio of 38, Netflix, a company that analysts (pre-acquisition) estimate will grow earnings at an annualized rate of 23% over the long term, looks like a strong buy for long-term investors.
Yes, Netflix will likely head higher from here, even if it takes some time as all of this acquisition drama plays out.
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Justin Pope has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Netflix, Walt Disney, and Warner Bros. Discovery. The Motley Fool has a disclosure policy.
