Netflix is aiming to revert to its Debtflix moniker to finance its potential acquisition of Warner Bros.

The streaming service, formerly identified as “Debtflix,” prior to achieving substantial revenue generation, intends to secure tens of billions of dollars in new debt to fund its proposed $72 billion acquisition of a significant portion of Warner Bros. Discovery Inc. However, Netflix Inc. Possesses a more robust financial standing than it did pre-pandemic, which will likely enable the company to increase its offer price in any competitive bidding scenario, all while maintaining its investment-grade credit rating.

“Netflix’s credit profile really turned around,” said Stephen Flynn, an analyst covering telecom and media debt at Bloomberg Intelligence. “They’ve come a long way from high yield.” 

The company’s current agreed acquisition includes $59 billion of temporary debt financing from Wall Street banks. The entertainment giant plans to eventually replace that with as much as $25 billion of bonds, $20 billion of delayed-draw term loans, and a $5 billion revolving credit facility. Some will probably also be paid down with cash flow. 

The firm's financial obligations could increase further following Paramount Skydance Corp.'s introduction of a hostile takeover bid for the entirety of Warner Bros., assigning a valuation exceeding $108 billion inclusive of liabilities, approximately $26 billion higher than Netflix's bid. Both potential transactions would likely encounter scrutiny from antitrust regulators.  

According to a group of Morgan Stanley analysts headed by David Hamburger, increasing debt burdens pose a present danger to Netflix shareholders. The streaming giant, which holds an A rating from S&P Global Ratings and a slightly lower A3 rating from Moody’s Ratings, could face a downgrade to the BBB tier, according to the analysts' communication on Monday. They advise divesting the company's debt instruments maturing in 2034 and 2054, anticipating that Netflix might issue substantial new debt, leading to a reduction in its credit ratings.    

Beyond credit rating reductions, the corporation faces additional hazards; it's tasked with finalizing one of history's most substantial media agreements. Should authorities decide to halt the acquisition, Netflix would be obligated to disburse a $5.8 billion forfeiture as a breakup fee, without securing a new venture to enhance its earnings.   

Nevertheless, numerous experts and financiers consider the potential dangers to be controllable. The additional returns demanded for the firm's borrowings have seen minimal alteration throughout the past seven days. On Monday, Moody’s confirmed Netflix’s A3 credit grade, pointing to the company's robust operational results and the advantages it will receive from obtaining “some of the most highly regarded intellectual property in the media industry,” encompassing Harry Potter, HBO, and DC Comics. The credit evaluation body adjusted its perspective on the company to “stable” from “positive,”, indicating a minor rise in exposure for the business due to the purchase.

Bloomberg Intelligence's figures suggest that Netflix's total debt could reach approximately $75 billion under the current deal stipulations, a significant increase from its present $15 billion. Nevertheless, despite a considerably larger debt burden, the combined entity is projected to produce roughly $20.4 billion in earnings available for interest payments next year, commonly referred to as earnings before interest, taxes, depreciation, and amortization. 

At that point, the net debt would be approximately 3.7 times Ebitda. Subsequently, in 2027, profits are anticipated to increase, reducing the leverage ratio to around the mid-2x bracket, as reported by BI, which is a more standard figure for a company with an investment-grade rating. 

“Overall, Netflix is a very, very strong credit,” BI’s Flynn said. “They’ve got growing revenue, growing Ebitda, and growing free cash flow, so the pro-forma company can de-lever quite quickly.” 

Netflix's increasing debt mirrors its substantial borrowing prior to the pandemic, but with a significant distinction: the streaming leader is considerably more robust today. Netflix initially began issuing high-yield bonds in 2009 as it shifted from primarily mailing DVD rentals to offering streaming services. Throughout subsequent years, its debt climbed to as much as $18.5 billion while it acquired more rights for streaming films and television shows, and commenced producing successful original content such as “House of Cards” and “Stranger Things.”.   

Certain critics referred to the firm “Debtflix” due to its accumulating debts. However, its subsequent investments proved to be forward-thinking. The worldwide health crisis began in 2020, leading to substantial financial inflows for the business as individuals globally were confined to their residences during quarantine, desperate for entertainment. Netflix possessed a backlog of television programs and films ready for distribution, which turned out to be more profitable than the organization had anticipated.

In 2023, the firm began producing over $6.9 billion in annual free cash flow. Credit rating agencies have upgraded it as investment-grade, enabling it to secure financing at a lower expense during a period when its need for borrowed funds was reduced.

“Netflix has earned the right to take on an acquisition of this size,” said Jim Fitzpatrick, head of US investment-grade credit research at Allspring Global. “Their balance sheet has plenty of capacity to accommodate something like this, even if they have to up their bid.”