Bernstein 'Surprisingly' Likes the Idea of Disney (DIS) Buying Netflix (NFLX)

In a note this morning Bernstein analyst Todd Juenger said they are 'surprisingly' open to Disney (NYSE: DIS) acquiring Netflix (NASDAQ: NFLX).

This conclusion come as the analyst tackles one very popular question they receive from investors: "What do you think of the idea of Disney acquiring Netflix?" While they are not not calling for a deal, nor do they have any knowledge one is being or will ever be contemplated, after reviewing it they are open to it.

Juenger estimates ~31% dilution from such a deal but argues they don't care so much about the dilution. What matters, he said, is whether what was bought is worth, to your shareholders, more or less than what you paid, and how does that compare to the NPV of the next best alternative. He also notes that some have argued that Netflix can bring Disney its next CEO in Reed Hastings.

The analyst said arguments to shoot down an acquisition are easy to make, but they can just as easily rebut those:

• Disney would be paying ~$70bn for almost no earnings. He said comparing $70bn to the current earnings contribution is the wrong comparison. "The salient question is whether the NPV, to Disney, of acquiring the assets of Netflix (including its ~90mm global subs, user interface, brand name, original programming, and user data, to name a few), is greater than or less than $70bn (compared to whatever is the base case scenario).
• Disney would be embracing, and in success accelerating, the root of its own demise. "The SVOD model will, inevitably, lead to the demise of the current linear TV network model/bundle, regardless of whether or not Disney owns Netflix."
• Disney has an incredible library of strong entertainment brands and content. If Disney so desired, it could build
  its own SVOD service for much less than $70b (Disney has already initiated its on proprietary SVOD efforts, through the Hulu JV and BAMtech stake) "Building a Disney service would take time, effort, and would have to compete with Netflix." and "The Hulu JV is impossibly unwieldy given its JV structure... "BAMtech may just be a "Plan B". Disney could always elect not to exercise its option for greater control (and could even sell its stake2)."
• It's too late. If Disney wanted to do this, should have done it five years ago. "Five years from now (2022), investors might look back and say "would have been a good idea in 2017, but now it's too late".

A 50/50 stock/cash deal at a 40%, or $160/share, they estimate -31% dilution to Disney.

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