Netflix Would Love This Deal

There's a movie merger underfoot, and Netflix (Nasdaq: NFLX  ) can't wait to see signatures on the dotted line.

No, nobody is buying the subscription-style movie rental pioneer. The rumor mill might have you believe that Google or Apple would swoop in and pounce on the cratering share price to get an instant rental solution on the cheap.

But the Netflix board would be crazy to accept a lowball offer here, and investors should see the long-term value beyond these short-term issues as well.

A hostile takeover would be difficult, too -- Netflix runs a classified board and has authorized the use of "blank check preferred stock" defenses. Netflix currently has about 55 million shares outstanding, or 58 million assuming that the new financing converts into shares. Suddenly adding 10 million preferred shares with enhanced voting rights would change the takeover games in a hurry.

And though the business runs from Los Gatos, Calif., the company is incorporated under Delaware law, which means that a hostile bid would take at least three years to run its course.

Mark my words -- this stock won't be cheap anymore three years down the road.

So no, this isn't about a Netflix buyout, hostile or otherwise. Bloomberg's secret sources say that Summit Entertainment is in merger talks with Lions Gate Entertainment (NYSE: LGF  ) .

Privately held Summit is best known as the studio behind the Twilight blockbuster franchise, which has grossed $1 billion domestically and $2.3 billion worldwide. One Twilight film is currently in theaters and adding to that score, and there's another coming next year.

So why would Netflix love to see this merger happen? Because the company gets to stream Lions Gate films through its deal with the Epix cable channel. That five-year contract has nearly four years remaining, which should cover the useful life of the Twilight content.

Look, this is not great cinema or even a good story. But the vampire-werewolf melodrama strikes a nerve with youngsters, and it's a cash machine. The minute Netflix can advertise that Jacob and Edward get to fight over Bella through its streaming service, teenage begging will commence all over the nation. I mean the kicking and screaming kind.

Yeah, Netflix wants that to happen as soon as possible. It's not a slam dunk, as media watcher Nikki Finke notes: "All the discussions are preliminary and speculative and could easily fall apart." But I'm keeping a close eye on this potential deal -- just click here to do the same by using our handy watchlist feature.

Fool contributor Anders Bylund owns shares of Google and Netflix but holds no other position in any of the companies mentioned. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Google, Apple, and Netflix, and have also recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


Read/Post Comments (9) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 30, 2011, at 3:26 PM, hongchang wrote:

    Keep up the pumping work. NFLX won't be cheap 3 year from now, it will be zero! Your fools just can't stop pumping this fraud which let its insider sold in 220 on corporate buy back and dilute ordinary share holders in the 70's. So keep it up and some fools will believe you!

  • Report this Comment On November 30, 2011, at 3:36 PM, hongchang wrote:

    And this tells all about you. You are officially a bag holder now!

    Netflix’s announcement on Monday that it had aborted plans to separate its streaming and DVDs-by-mail service halted the steep slide of its shares only briefly on Monday before they slid again near the close, despite a bullish day on the Nasdaq. They dropped again today (Tuesday), closing at a 52-week low of $108.66, down nearly 3 percent from Monday’s closing price. The influential investors’ blog SeekingAlpha.com said today that Netflix’s financial is so “dire” that it “could be bankrupt within a year.” The company, it said, “is in real trouble. This company has much deeper problems than just a series of PR flubs. It is nowhere close to being able to pay back their debts due within 1 year, let alone the next $1.3 billion due between 1 and 3 years.” On the other hand, Anders Bylund of TheMotleyFool.com wrote that Netflix’s increases in subscription fees could boost its sales 12 percent. “This makes Netflix a solid buy in my book again,” he said.

  • Report this Comment On November 30, 2011, at 4:35 PM, 123spot wrote:

    Seeking link did not reflect your quotations. Can you link more specifically to today 's article you referenced? Thanks. Spot

  • Report this Comment On November 30, 2011, at 5:26 PM, Becker2011 wrote:

    I just have to wonder if all of these teens already own the movies they love. I would think yes - considering there are midnight release parties, so kicking and screaming to stream a dvd you already own just doesn't make sense to me.

    I like the netflix service but just don't see a huge positive here.

  • Report this Comment On November 30, 2011, at 5:50 PM, hongchang wrote:

    This Anders guy bought all the down from 100+ to 60 and hope someone would bail him out. Pathetic pumping work!

    http://seekingalpha.com/article/298845-why-netflix-could-be-...

  • Report this Comment On November 30, 2011, at 6:54 PM, MikeVids wrote:

    I've been following the NFLX story daily and throughout the entire course of its fall from 300 plus I've never heard this guy once seriously warn his followers that they might want to reconsider their positions. All he does is write articles that promote this stock. I don't know if Motley Fool employs him, but what he has written pumping this stock seems to be unconscionable in the light of all that has happened the last six months.

  • Report this Comment On November 30, 2011, at 8:42 PM, oneilmo wrote:

    This is an extremely weak and superficial endorsement of a company that will probably not even be around in three years.

    People vote with their feet. The insiders at NFLX have been selling shares as fast as possible, even as the company uses stockholder's money to buy back the stock. . . This article is an embarrassment.

  • Report this Comment On December 01, 2011, at 6:58 AM, The1MAGE wrote:

    Not sure if that is the same Alpha article that was ripped to shreds due to a glaring basic accounting error, but it still has that big error in it.

  • Report this Comment On December 06, 2011, at 4:46 PM, CFischer wrote:

    I really liked your article when the stock was in the low hundreds about how it "hadn't been that affordable in 2 years". hahaha.

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