Netflix stock falls amid scrutiny of potential Warner Bros. Discovery bid

Investing.com -- Netflix (NASDAQ: NFLX) stock declined 2.7% Wednesday as investors weighed the strategic implications and regulatory hurdles of its reported interest in acquiring Warner Bros. Discovery’s studio and streaming assets.

The streaming giant has reportedly retained a financial advisor and gained access to financial information to explore a potential bid. This move comes despite Netflix CEO Ted Sarandos recently telling investors that while the company evaluates acquisitions, they are traditionally "more builders than buyers."

Morgan Stanley analyst Benjamin Swinburne addressed the potential acquisition in a note to clients, highlighting both strategic rationale and significant challenges. "A deal, if announced, could introduce strategic questions & potentially face regulatory hurdles unique to Netflix as a buyer," Swinburne wrote.

The analyst outlined several potential motivations for Netflix’s interest, including Warner Bros.’ century-old studio legacy, deep content library, and ownership of valuable franchises like DC Comics, Harry Potter, and Lord of the Rings. HBO’s prestige TV brand and successful transition to streaming could also be attractive assets.

However, Swinburne raised important questions about how Netflix might operate these businesses. The streaming company could potentially shift Warner Bros.’ theatrical distribution model to direct Netflix releases and exit third-party licensing arrangements. Such changes would pressure earnings of the acquired businesses in the near term.

For HBO, Netflix might consider shutting down the service entirely and moving all content to its own platform—walking away from nearly $2 billion in adjusted EBITDA but potentially better monetizing the content through its global distribution network.

The analyst noted that regulatory approval could be a significant obstacle, writing: "As the largest streaming company in the world, we believe Netflix would likely face regulatory hurdles should it bid for and reach an agreement with Warner Bros." Concerns from theater operators, labor unions, and streaming competitors would likely emerge.

Swinburne’s analysis suggests Netflix would only pursue such an acquisition if it believed the long-term value creation from exclusive content distribution would exceed both the purchase price and the earnings reduction from business model changes. The hypothetical acquisition could be valued at $20-30 per share, primarily financed through cash and debt.

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