Netflix (NFLX) Pop on Disney (DIS) Deal Was an Overreaction - Analysts

December 5, 2012 7:13 AM EST
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Netflix (Nasdaq: NFLX) shares are indicated slightly lower Wednesday, after ripping 14 percent higher Tuesday on news that it inked a content deal with Disney (NYSE: DIS). But, was the pop warranted?

Atlantic Securities says no. The firm notes that Netflix previously had Disney content via a deal with Liberty Media's (Nasdaq: LMCA) Starz. As of the third-quarter last year, Netflix said Starz represented 6 percent of domestic streaming.

On paper, a 6 percent rise from Monday's close indicates that Netflix should be trading somewhere around $80.56 per share.

As noted yesterday, Netflix won't even be getting fresh content from Disney until 2016, a three-year wait for investors. Some speculate that the deal fits in nicely with Disney's recent acquisition of Lucasfilm, as the next "Star Wars" film is set for release sometime in 2015.

Janney's Tony Wible also voiced some concern over the deal. Wible said, "[w]e question why a deal was struck 3 years in advance, given the uncertainty in the streaming landscape (total addressable market? market share?). [Netflix] might be setting up to raise capital as DIS would likely require given the size of the counterpart risk with a deal like this." Wible also expects the deal to cost Netflix about $350 million per year, or roughly $10 million per film, commenting, "Any deal will likely require substantial capital resources, possible in the form of reserved cash to satisfy [Disney] need for a stable counter party. Timing of cash flow is not known, but we would not be surprised if [Netflix] would need to raise capital."

Albert Fried's Rich Tullo agrees, saying he expects that Netflix will issue a new convertible bond in an effort to raise between $1 billion and $2 billion.

That doesn't mean certain notable investors aren't bullish on the deal, though. Locking in Disney content is still locking in Disney content.

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