Netflix (NFLX) is stretching its balance sheet to the limit with the planned acquisition of Warner Bros. Discovery (WBD), triggering a warning from bond analysts. The independent corporate-bond research firm Gimme Credit lowered its recommendation on the streaming platform’s debt to Underperform on Tuesday, sending a clear signal that the market worries about the deal math.
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Netflix has agreed to pay roughly $72 billion for Warner Bros, which includes paying $27.75 per share in cash and stock. To fund the deal, Netflix must assume nearly $11 billion in existing debt and intends to take on around $50 billion of new debt.
$50 Billion Debt Threatens Investment Grade Status
The massive amount of new debt will immediately push Netflix’s debt-to-EBITDA ratio to more than four times its current level of around 1.1 times. This ratio exceeds the three-times threshold typically sought by companies looking to maintain investment-grade debt ratings.
Netflix currently holds single-A credit ratings, but analysts have warned the planned acquisition could drop those ratings to triple-B, the lowest investment-grade mark. While Netflix Chief Financial Officer Spencer Neumann committed to a “healthy balance sheet and our solid investment-grade credit ratings,” the analyst community remains skeptical.
Gimme Credit analyst Dave Novosel wrote that the acquisition’s immediate impact is “decidedly negative.” He also raised concerns about management’s priorities. Novosel noted that while the company should produce free cash flow of $9 billion per year or better, management said that while it will prioritize de-leveraging, it will “still pursue share repurchases.”
Mergers Fail and Bidding Wars Loom
The debt burden creates significant risk, especially with a potential bidding war against Paramount Skydance (PSKY) threatening to drive the price even higher. Novosel pointed out the historical risk, writing, “The history of media mergers is littered with failed marriages.”
He also suggested that the deal may not even close for Netflix, writing, “We believe there is a good possibility that either the Netflix transaction does not get approved or that Paramount ultimately prevails, given its hefty backing by Ellison family money.” Netflix faces a few strained years before planned cost savings kick in, as it continues to need huge investments in content.
Key Takeaway
The final takeaway from this story is that Netflix’s aggressive $72 billion bid threatens its credit rating, and this confirms the market’s worry about the deal’s debt burden.
Bond analysts downgraded Netflix because the $50 billion in new debt will immediately breach key investment-grade thresholds. This debt risk, combined with a potential bidding war and the history of failed media mergers, makes the deal’s immediate impact decidedly negative.
Is Netflix a Buy, Hold, or Sell?
Analyst sentiment toward Netflix (NFLX) is rated as a Moderate Buy, based on the consensus of 38 Wall Street analysts tracked in the last three months. Of these ratings, 27 analysts call it a Buy, nine recommend a Hold, and two recommend a Sell.
The average 12-month NFLX price target sits at $134.30. This target implies an upside potential of 38.6% from the last price.
