Netflix has agreed to buy the TV/film studios, plus streaming divisions, of Warner Bros. (WBD) in a cash and stock transaction.
WBD will spin out its cable TV assets in advance of this transaction. The agreement is for $23.25 in cash and $4.501 worth of shares in Netflix stock for each share of WBD common stock. This values WBD at around $72.0bn, or $82.7bn if debt is included.
Shareholder and regulatory approvals are required before completion, which is expected in around 12-18 months.
The shares fell 3.1% in pre-market trading.
Our view
Netflix has announced its biggest move yet - a blockbuster deal to acquire Warner Bros.’ studios and streaming divisions. The transaction is far from finalized, with rival bidders still in the mix and a lengthy regulatory process ahead. Still, Netflix appears confident, committing to a $5.8bn breakup fee if the deal falls through.
The acquisition would deliver a slate of top-tier franchises, significantly boost Netflix’s production capabilities, and serve as a defensive move to prevent legacy competitors from gaining ground in streaming. There are obvious cost synergies from combining streaming operations, but the key question remains: will this meaningfully improve engagement?
HBO Max, Warner Bros.’ streaming service, shares a large portion of its subscriber base with Netflix, meaning the deal won’t bring a wave of new customers. For now, both platforms will remain separate, probably a wise move. Merging could raise pricing challenges - would customers pay double for the combined content? Unlikely. In short, we see benefits, but don’t think this move eases concerns that Netflix has hit peak engagement.
Back to business, Netflix continues to perform well across most measures that matter. It’s ability to reduce churn (customers flip-flopping to rivals) is firmly rooted in its best-in-class original content. While it's expensive to make, it does keep eyeballs on screens in a bigger way. Add in a cash-generative business, and Netflix can increase content spending when peers are having to pull back.
The introduction of an ad-supported product is proving more popular than many could have hoped. It allows Netflix to penetrate new markets and tap into users who are priced out of the fully paid service. Engagement is up too, with viewing share hitting record highs in both the US and UK this quarter.
The group also has a market-leading international production and distribution network. Doing localised content right isn't easy, but Netflix has an enviable track record here. This is important because longer-term subscriber growth will need to come from emerging markets.
Cash flow is good, and the balance sheet can absorb the c.$50bn of new debt it’ll need to take on to help fund the Warner Bros. deal. Still, bringing down debt if it completes would be a key priority.
Netflix is a market leader, and there are plenty of moving parts these days, which could add up to longer-term growth. But we expect sentiment to remain subdued in the near term, with the Warner Bros. deal presenting a clear risk - not only because it’s far from finalized, but also due to uncertainty over whether it will deliver meaningful engagement growth.
Environmental, Social and governance (ESG) risk
The media industry’s ESG risk is relatively low. Product governance is the key risk driver, alongside business ethics, labour relations and data privacy & security.
According to Sustainalytics, Netflix’s management of material ESG issues is average.
Netflix has to comply with significant and often complex regulations and laws, across a very large number of different countries. The group has a global anti-corruption policy, but this is not publicly disclosed, making its effectiveness difficult to assess.
There are both internal and external audits on IP infringement risk, as well as its independent ethics hotline available for employees. Cybersecurity issues are addressed by the audit committee. But it’s unclear there is any managerial or board-level responsibility for privacy management.
Netflix key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.