Netflix Looks to Become Debtflix Again to Fund Warner Bros. Acquisition

A Debt-Fueled Ambition

Netflix, the streaming giant, is once again looking to take on significant debt to finance its ambitious plans. The company is seeking to acquire most of Warner Bros. Discovery Inc. in a deal worth $72 billion, which would add tens of billions of dollars to its already substantial debt load.

From Junk Bonds to Investment-Grade Status

Netflix’s history with debt is well-documented. The company was once known as “Debtflix” due to its heavy borrowing in the past. However, after generating significant cash flow during the pandemic, Netflix has managed to upgrade its credit profile and become an investment-grade company. This stronger balance sheet will likely allow the company to outbid competitors in any potential bidding war and maintain its investment-grade status.

The Acquisition Plan

The planned acquisition includes $59 billion of temporary debt financing from Wall Street banks, which will eventually be replaced by $25 billion of bonds, $20 billion of delayed-draw term loans, and a $5 billion revolving credit facility. Some of this debt will likely be paid down with cash flow, but the company’s debt load is expected to swell even further.

Risks and Challenges

While many analysts and investors see the risks as manageable, there are still several challenges ahead. The acquisition faces potential antitrust concerns, and regulators could move to block the transaction, resulting in a $5.8 billion penalty. Additionally, the company’s debt levels are a risk for investors, and a downgrade to the BBB tier is possible.

A Strong Credit Profile

Despite these risks, Netflix’s credit profile is considered strong. The company’s revenue, Ebitda, and free cash flow are all growing, and the pro-forma company is expected to be able to de-lever quickly. According to Bloomberg Intelligence, Netflix would have around $75 billion in debt if the acquisition goes through, but the company’s earnings would still be able to cover interest payments.

A New Era for Netflix

The acquisition would bring significant intellectual property to Netflix, including Harry Potter, HBO, and DC Comics. While there are risks involved, many analysts believe that Netflix has earned the right to take on an acquisition of this size and that its balance sheet has plenty of capacity to accommodate it.

Source: Link