Netflix Stock Slides 5% on Warner Bros. Discovery Bid Concerns
Investors weigh the massive financial burden and significant antitrust hurdles of a potential multi-billion dollar media mega-merger.
Netflix (NFLX) shares fell more than 5% in Wednesday trading as investor anxiety mounted over reports that the streaming giant is pursuing a blockbuster acquisition of Warner Bros. Discovery (WBD).
Shares in the streaming pioneer closed down 5.18% at $103.68, wiping out over $20 billion in market value. The sell-off reflects growing concerns about the immense financial and regulatory risks associated with what could be one of the largest media deals in recent history. Conversely, shares of Warner Bros. Discovery have rallied to 52-week highs on the speculation, as its investors welcome a potential takeover.
Netflix has reportedly submitted a binding, predominantly cash offer for Warner Bros. Discovery's studio and streaming assets, a move that would unite two of Hollywood's most powerful players. Such a deal would bring Warner Bros.' coveted library, including franchises like DC Comics and Harry Potter, along with the prestigious HBO catalog, under Netflix's roof. The strategic goal would be to create an unassailable leader in the fiercely competitive streaming market, potentially ending the so-called 'streaming wars'.
However, the market is focused on the deal's daunting challenges. The potential price tag, estimated to be in the range of $70 billion, would represent a monumental financial undertaking for Netflix. While the company has a strong balance sheet, the acquisition would almost certainly require it to take on tens of billions in new debt. Warner Bros. Discovery already carries over $34 billion in debt, which would further strain the combined entity's finances. Analysts at Morgan Stanley have questioned the value of such a deal for Netflix, suggesting it could face the "toughest regulatory path" and have the "smallest synergy opportunity" compared to other potential bidders. Benjamin Swinburne, a Morgan Stanley analyst, projected the deal could reduce Netflix’s free cash flow per share by 10% to 15%.
The most significant obstacle appears to be regulatory. The prospect of a combined Netflix-HBO Max entity has already raised red flags with antitrust authorities. According to reports, senior White House officials are scrutinizing the potential merger, expressing fears that it would grant Netflix "too much power over Hollywood." Regulators are concerned that a deal would stifle competition in the streaming landscape, where Netflix already holds a dominant position.
Adding to investor caution was the news of significant insider selling. Netflix co-founder and director Reed Hastings recently sold approximately $40.7 million in shares, a move that, while potentially pre-planned, has done little to soothe market jitters about the company's trajectory and the wisdom of such a large-scale acquisition.
The proposed merger represents a dramatic strategic pivot for Netflix, whose executives have previously downplayed interest in acquiring legacy media assets. The move signals a recognition that in a maturing streaming market, owning extensive and high-quality intellectual property is paramount for long-term subscriber growth and retention.
While Netflix may argue that a bundled service could lead to consumer price cuts, the path to regulatory approval in both the U.S. and Europe is expected to be arduous. One government official indicated that such a deal would trigger a "long slog" of an investigation, drawing comparisons to the intense scrutiny faced by tech giants like Google and Amazon.
As Netflix's market capitalization hovers around $462 billion, compared to WBD's approximately $59 billion, the company has the scale to attempt the acquisition. Yet, investors are signaling that the potential rewards may not outweigh the colossal financial and regulatory risks involved in attempting to build a media empire of this magnitude.