It has been confirmed that Netflix will buy Warner Bros. Entertainment. Discovery Inc. for $72 billion, in a cash and stock deal that will value Warner Bros. At $27.75 per share. This is one of the largest media deals ever in the world, along with Vodafone’s acquisition of Mannesmann, and Disney’s purchase of 21 companies.street Century Fox for $71.3 billion. It’s also a symbol of how the new streaming era has taken over Hollywood by purchasing one of its best and most respected studios.
Investors received cold news of the Warner Bros. deal
However, investors do not trade on tokenism. They trade in facts and feelings. Netflix’s share price fell by more than 2% on the back of the announcement of the deal, and the share price has fallen over the past month and has fallen by more than 6%.
The track record of mega deals is worrying
Investors’ lack of enthusiasm is due to multiple factors, including a history of huge acquisitions failing and not delivering their promised returns. These companies include AOL, Time Warmer, Daimler Benz, Chrysler, Spring, and Nextel Communications. Transactions of this size and scope are complex and execution must be perfect to achieve the expected benefits.
Content concerns
There are also some immediate concerns weighing on sentiment toward the stock, including concerns that Netflix subscription prices will need to rise to justify this deal, which could hurt future revenue growth. There are also concerns about the quality of the content. If Netflix now has access to the catalog of HBO and Warner Bros. Will this discourage them from producing new content?
Will Netflix take its eyes off the ball as deal logistics continue?
It is worth noting this point, as the deal is not expected to close for 12 to 18 months, and there will likely be high levels of scrutiny by US and EU regulators as it raises legitimate monopoly concerns. So, will Netflix take their eyes off the ball as they try to launch this deal? In our view, this is the main driver of Netflix’s stock price decline on Friday. Also, if the deal falls through or fails to get approved, Netflix will have to pay Warner Bros. Nearly $6 billion.
The company also said it could achieve cost savings of $2 billion to $3 billion annually. With no potential deal yet in the future, this has no calming effect on investors yet.
Reasons to make you cheerful
However, on the upside, this deal would: 1, give Netflix an impressive catalog that many people might think is worth paying a higher subscription for, 2, a talented group of filmmakers who can deliver quality content for many years to come, 3, would cement Netflix as a dominant force in film and television.
Paramount and Disney are in the crosshairs of a Netflix deal
Interestingly, Netflix’s biggest streaming peers also declined today. Paramount’s stock price is down more than 2% while Disney has seen a moderate loss of just 0.16% so far on Friday. This suggests that although the market has not welcomed the Netflix deal, some investors may see this deal as a threat to Netflix’s competitors, and may slow their subscriber growth in the future if they cannot compete with the Warner Bros./Netflix content slate.
The Netflix chip trumps risk appetite
At present, the details of how the new company will operate are unknown. The market needs to get used to the idea of what this will mean for the global broadcast business and the regulatory hurdles it may face.
A sharp decline in Netflix’s share price has taken away global risk appetite and US indexes as they attempt to post gains for a second straight week, while the S&P 500 tries to achieve a new record high before the end of the year.
After that, the PCE index will be the next major mover for stocks, however, if Netflix falls further once the US markets open, it could be a drag at the end of the week.
