Roku (ROKU 1.58%) has been capturing headlines lately due to rumors that Netflix (NFLX 1.74%) may be interested in acquiring the company. The combination would make sense in some respects. Roku gives users access to their streaming services through its platform, and its market capitalization has fallen more than $50 billion from its high.
Note, however, that this is only speculation as neither Roku nor Netflix have substantiated the news. Still, it can be an interesting exercise to consider the benefits of their potential merger, so let's look at the prospects of such a deal.
The benefits for Netflix
There are several reasons Netflix would be interested in acquiring Roku. To start, the leading streaming company has announced plans to launch an ad-supported version of its service as early as this year. However, this is not as easy as flipping a switch to turn advertisements on. Netflix will need to invest in developing the capability to deliver advertisements to audiences and sell that inventory to marketers. Roku has extensive experience in this arena, which would help Netflix in that pursuit. It could save Netflix considerable time to acquire this infrastructure through Roku rather than developing it in-house.
Roku's platform is already the No. 1 television operating system in North America. That scale would also provide Netflix with valuable data on what content people watch from competing services. Moreover, it reduces the competitive risk for Netflix, because with Roku under its arm, the company would benefit from the success of other streaming services on the Roku platform. It could leverage the platform by prioritizing its own service over any rivals as well.
The roadblocks to a deal
From a financial perspective, Roku has over $2 billion in cash and equivalents on its balance sheet with little debt. In contrast, Netflix holds $6 billion in cash with almost $15 billion of debt. Therein lies one of the challenges to consummating this deal.
Data by YCharts.
Although it may be tempting for Netflix to pursue Roku given the strategic benefits mentioned above, financing the deal is another matter. Roku has a market capitalization of $10.7 billion as of this writing. Netflix would have to pay a buyout premium, easily bringing the price tag to $13 billion or more. The company doesn't have nearly enough for an all-cash offer, and with its debt balance already at the high end of management's target range of $10 billion to $15 billion, management is likely hesitant to issue even more debt to finance the purchase.
That leaves Netflix with a combined cash and stock offer, or even an all-stock transaction, but that presents its own issues given the fact shares of Netflix are down over 75% from their all-time high. And on Roku's end, the company may similarly be hesitant to sell after the even steeper 85% decline its stock has experienced in the past year.
It all points to the low probability of a deal happening between the two streaming companies.
