Since speculation emerged last fall that Disney might be interested in getting its paws on Netflix, Wall Street has been split on whether such a tie-up would be a bold, smart move or an unnecessarily risky gambit.
In a report issued Jan. 10, Credit Suisse analyst Omar Sheikh weighed in on the pros and cons. His conclusion: The estimated $70 billion Disney would have to fork over for Netflix would make the deal hard to justify, despite potential synergies, including the ability to sell over-the-top live sports packages to Netflix customers.
“We believe Disney will most likely follow the more conservative, organic path and choose not to acquire Netflix,” Sheikh wrote.
Disney and Netflix have declined to comment on whether they have engaged in deal talks. But Disney chief Bob Iger has publicly discussed his belief that the company needs to adapt to the internet’s shifting tides, as it continues to shake up the content-distribution landscape. Iger, whose current contract runs through June 2018, is said to be on the prowl for a major digital acquisition that would power Disney’s growth in the years to come.
Netflix is worth north of $56 billion — and any offer for the world’s biggest subscription-streaming service, with more than 80 million paying customers, would have to be at a sizable premium. For the sake of context, such a transaction would be more than quadruple what Disney paid combined for Pixar ($7.4 billion), Marvel Entertainment ($4 billion), and Lucasfilm ($4 billion).
Iger might also be looking to execute a major deal as a way to convince the Disney board to let him stay on longer as CEO. “It’s not inconceivable that Bob Iger might want to make one last big splash on the way out,” says Tuna Amobi, senior equity analyst at CFRA Research.
Netflix would give Disney a robust direct-to-consumer platform for its premium programming on a global scale (some 190 countries), as well as a valuable and widely known brand, along with a virtual treasure trove of viewer-engagement data. “Disney certainly needs to have a massive [over-the-top video] story, and that could be Netflix,” says Peter Csathy, founder of investment and advisory firm Creatv Media. “If you want to play in the subscription VOD space, and you want to seize that lifestyle globally, it’s all about Netflix.”
To the extent Disney would be able to accelerate Netflix’s success, “the faster it would cause the demise of Disney’s core TV network businesses,” noted Bernstein analyst Todd Juenger in a research note last month. “But then we reminded ourselves — we believe the demise will happen anyway. From that POV, it is better, then, to own the winning solution.” There’s still the question of whether Disney needs to spend $70 billion to acquire, rather than build, a subscription VOD service. But Disney would acquire more than assets and subscribers, Juenger argued: It would also acquire significant talent. “Whether or not Reed Hastings would really be a candidate for the next Disney CEO, he and the rest of Netflix’s management would inarguably bring a wealth of talent and fresh thinking to Disney’s leadership.”
By buying Netflix, Disney-owned studios could expand their relationship with the streaming platform to develop original content and distribute it on a subscription VOD basis globally. But the acquisition might make other content suppliers even more cautious about selling TV shows and movies to Netflix.
In any case, Iger has shown an appetite for digital media. Last summer, Disney announced a $1 billion investment in Major League Baseball’s BAMTech, which provides video-streaming infrastructure for MLB TV, HBO Now, WWE, Sony PlayStation Vue, and others. That doesn’t overlap directly with Netflix: Whereas BAMTech is focused on live video, Netflix has expertise in acquiring and distributing large libraries of on-demand content across multiple devices and broadband networks, along with its established subscriber acquisition and retention operations.
As of Oct. 1, Disney had $4.6 billion cash and equivalents, and its debt stood at about $24 billion. That means that regardless of the mix of cash and stock, a hypothetical Netflix deal would be a massive chunk to bite off. Amobi says he would be surprised if the company launched a full-scale play for Netflix, in no small part because “Disney is very protective of its investment-grade rating.”
Still, analysts say it is within the realm of feasibility for Disney to swing a deal for Netflix. Disney, with a solid credit rating, has plenty of capacity to take on more leverage if it chooses to. Moreover, debt markets remain attractive and open to facilitating major M&A deals. Last year, for example, Charter Communications put together a deal for Time Warner Cable that involved Charter raising nearly $27 billion in new debt.
While a deal for Netflix would likely dilute Disney earnings, short-term dilution doesn’t mean investors will automatically reject a huge bid, says Dan Salmon, BMO Capital Markets’ managing director of media and internet research. He notes that the market reacted favorably to Facebook’s $19 billion, highly dilutive deal for messaging service WhatsApp, while that has yet to produce significant revenue.
“Disney’s job would be to show the strategic rationale makes sense over the long term,” Salmon says.
Tony Wible, an analyst with Drexel Hamilton, sees the possibility for skepticism on both sides of a potential deal. “A merger may be difficult for many Disney shareholders to embrace as some will see Netflix as a broken business model,” he wrote in a recent research note. “Netflix management may also not want this and may see Disney as an antiquated and inferior business model.”
Given Netflix’s size, not many strategic buyers apart from Disney are in a position to contemplate an acquisition. But another company that has been described as a potential acquisitor is Apple, which bought its way into streaming music with its Beats purchase. Apple could do the same in streaming video, using Netflix to juice sales of iPhones, iPads, and Apple TV devices.
“No matter what they say, Apple wants to play in the premium SVOD space,” Csathy says.
Netflix is not a motivated seller, however, and would likely balk at getting swallowed by a media conglomerate unless there is a clear vision for how the service would be integrated. CEO Reed Hastings has shown no signals that Netflix is looking for a buyout.
Says BTIG analyst Rich Greenfield, “My guess is Disney needs Netflix more than Netflix needs Disney.”