Netflix deal attracts investor scrutiny

It has been confirmed that Netflix will buy Warner Bros. Discovery Inc for a whopping $72bn, in a cash and stock deal that will value Warner Bros. at $27.75 per share. This one of the world’s largest ever media deals, along with Vodafone’s acquisition of Mannesmann, and Disney’s purchase of 21^st Century Fox for $71.3bn. It is also symbolic of how the new era of streaming has taken control of Hollywood by purchasing one of its best and most revered studios.

Investors cool reception to news of Warner Bros deal

However, investors don’t trade on symbolism. They trade on facts and sentiment. The Netflix share price is down more than 4% in pre-market trading on the back of the announcement of the deal, and the share price has been sliding over the past month and is down more than 6%.

Track record for mega deals is concerning

Investors’ lack of enthusiasm is down to multiple factors, including a track history of mega buyouts going sour and not delivering their promised returns. These include AOL and Time Warmer, Daimler Benz and Crysler and Spring and Nextel Communications. Deals of this size and scope are complicated and execution needs to be perfect to deliver the expected benefits.

Content concerns

There are also some immediate concerns that  are weighing on sentiment towards the stock, including fears that Netflix subscription prices will need to surge to justify this deal, which could hurt revenue growth going forward. There are also concerns about content quality. If Netflix now has access to HBO and Warner Bros. back catalogue, then will it disincentivize them to produce new content?

Will Netflix take their eye off the ball as deal logistics drag on?

This point is worth noting, the deal is not expected to close for 12-18 months, and there is likely to be high levels of scrutiny by US and EU regulators as it brings up valid monopoly fears. Thus, will Netflix take its eye off the ball while it tries to get this deal off the ground? In our view, this is the main driver of Netflix’s share price decline on Friday. Also, if the deal falls through or fails to get approval, Netflix will have to pay Warner Bros. nearly $6bn.

The company has also said that it can find cost savings between $2bn-$3bn per year. With any potential deal so far out in the future, this is not having a mollifying impact on investors just yet.

Reasons to be cheerful

However, on the upside, this deal would 1, give Netflix an amazing back catalogue that many people may think is worth paying a higher subscription for, 2, a talented group of film makers that could drive quality content for many years to come, 3, it would cement Netflix as the dominant force in film and TV.

Paramount and Disney in crosshairs of Netflix deal

Interestingly, Netflix’s biggest peers in the streaming space are also lower today. Paramount’s share price is down more than 2% while Disney has experienced a moderate loss of just 0.16% so far on Friday. This suggests that even though the market has not welcomed the Netflix deal, some investors may see this deal as a threat to Netflix’s competitors, and it could slow their subscriber growth in the future if they cannot compete with a Warner Bros./ Netflix content slate.

Netflix slide takes edge of risk appetite

For now, the details of how the new company would work are unknown. The market needs to get used to the idea of what this would mean for the global streaming business and the regulatory hurdles that it would face.

The sharp decline in Netflix’s share price has taken the edge off global risk appetite and US indices as they try to post a second consecutive week of gains and as the S&P 500 attempts to make a fresh record high before the end of the year.

Up next , the PCE will be the next key driver for stocks, however, if Netflix sinks further once the US markets open, it could act as a drag at the end of the week.