Following a bidding war, Netflix (NASDAQ:NFLX) has announced its intention to purchase Warner Bros. (NASDAQ:WBD) and spin it off from Discovery Global, which will carry on as a publicly traded entity. Netflix’s decision to buy Warner Bros. represents the latest consolidation in the increasingly concentrated entertainment industry and could prove to be a major growth generator for Netflix. Why did Netflix buy Warner Bros., and how could the acquisition benefit Netflix’s own growth story going forward?
Assets Netflix Is Buying
The most obvious reason for Netflix’s decision to buy Warner Bros. is the massive library of intellectual properties it will be able to monetize directly through its streaming service as a result. As highlighted in Netflix’s own press release about the acquisition, Warner Bros. is the owner of some of the top intellectual properties of both the classic and modern eras. By buying it, Netflix will acquire content ranging from Citizen Kane, The Wizard of Oz and Casablanca to more modern titles that include Friends, the Harry Potter franchise, the DC Universe and The Big Bang Theory. All told, the Warner Bros. catalog is estimated to contain over 6,600 feature films, over 50,000 TV titles and some 14,000 pieces of animated content.
By buying such a large portfolio of intellectual properties, Netflix gains a massive number of high-value titles that can be added to its streaming service without having to pay licensing fees. Like Netflix’s original content, this could help push up margins and attract subscribers searching for titles that will now only be available through the streaming service.
Another key reason behind Netflix’s decision is likely the opportunity to massively expand its streaming customer base by acquiring HBO Max. Although it’s not yet clear whether HBO Max and Netflix will eventually merge once Warner Bros. has been acquired, the streaming subsidiary boasts about 130 million subscribers. This would be a huge expansion of Netflix’s already formidable streaming empire, which currently includes about 300 million subscribers of its own.
It’s also worth considering the value that Netflix could see as a result of acquiring a massive film studio. Although it once focused on delivering content created by others, Netflix has become a major force in film and television production. As of last year, almost 60 percent of Netflix’s US library was made up of original content. By adding Warner Bros., Netflix could substantially increase its production of new content and draw on the large base of IP to create new titles based on existing properties.
Finally, buying Warner Bros. appears to be part of a broader play by Netflix to attract and retain subscribers. With competition in the streaming space having become fierce in recent years, services are increasingly looking for ways to differentiate themselves and promote subscriber loyalty in a market where customers can easily cancel and rotate subscriptions depending on the content they want to watch at any given time. As Netflix noted in its press release, the amount and quality of content that will be picked up in the Warner Bros. acquisition could help with subscriber retention, thus increasing Netflix’s base of recurring revenue and creating additional value for shareholders.
Value Argument in Favor of Buying Warner Bros.
In addition to the assets it stands to gain from purchasing Warner Bros., it’s also worth noting that Netflix appears to be paying a very attractive price for the studio. At $27.75 per share, Netflix is valuing Warner Bros. at $72.0 billion with an enterprise value of $82.7 billion. With shares having risen close to the Netflix offer in anticipation of the buyout, WBD is still only trading at 1.7 times trailing 12-month revenues and 15.6 times cash flow. While the studio has only delivered $0.19 per share in earnings over the last 12 months, the synergies between Warner Bros. and Netflix could allow the streaming giant to bolster the profits generated by Warner Bros. and generate respectable returns from the purchase for shareholders.
Could Paramount Upset the Purchase?
Netflix’s planned acquisition of Warner Bros. may run into a snag in the form of a hostile takeover bid of $108 billion from Paramount. Though Netflix seems confident that the deal, as previously arranged, will go through, the bid from Paramount could present problems for Netflix due to the cash difference between the two offers. Netflix’s offer included just $23.25 in cash per share, with the remaining $4.50 being offered in stock. Paramount’s hostile bid, meanwhile, takes the form of an all-cash offer of $30 per share.
The bid could, however, further confirm the fact that Netflix arranged to purchase Warner Bros. at a favorable price. With Paramount prepared to pay more and lay out more in cash than Netflix, it seems that the rival studio and streaming service sees additional value on top of the price Netflix and Warner Bros. agreed to. Even if the Paramount bid doesn’t go anywhere, therefore, it could be a good sign for Netflix shareholders that the business is getting a good deal on WBD.
Why Netflix Bought Warner Bros.
While the transaction will have to bear up under both Paramount’s hostile takeover bid and likely regulatory challenges before Netflix can actually buy Warner Bros., the reasons behind the acquisition seem fairly straightforward. By buying Warner Bros., Netflix will gain a massive catalog of existing content and intellectual properties, one of the largest studios in the country and a base of streaming subscribers almost has as large as its own.
All of these assets have significant synergies with Netflix and could be much more valuable under its ownership than they are independently. As demonstrated by Paramount’s own interest in outbidding Netflix, Warner Bros. could prove attractive to other entertainment businesses. Assuming that Netflix carries through with the agreement it has already reached and isn’t impeded by regulators, though, it appears that it will be the ultimate beneficiary of the businesses and intellectual properties that Warner Bros. has built up over more than a century.
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