One of the biggest stories in the stock market in recent months is Netflix's (NFLX 0.21%) planned acquisition of Warner Bros. Discovery (WBD 0.74%) and the ensuing drama. Netflix proposed to acquire Warner Bros. Discovery's film and television studios for an enterprise value of nearly $83 billion, including about $11 billion of debt.
However, Paramount Skydance has jumped into the fray and tried to buy Warner Bros. in its entirety, which includes the cable assets that Netflix has no interest in. Warner Bros. continues to choose Netflix as the buyer, but Paramount isn't backing down. In recent months, Warner Bros. stock has surged, while Netflix's has collapsed. Wall Street analysts see downside in one of these stocks but recommend buying the other.
Image source: Netflix.
Warner Bros. has surged since rumors of an acquisition began
Warner Bros. has been in decline as more customers have pulled the plug in recent years and switched to streaming. The company has tried to buy other companies to close the gap but racked up significant debt in the process.
Speculation about a takeover last September fueled a huge move in the stock, which has more than doubled in just a few months. However, it seemed like Paramount was the leading candidate to buy the entire company. But then Netflix swooped in and announced an agreement to buy Warner Bros. Discovery's film and television studios, including HBO, for a total value of $27.75 per share, while the cable assets would be spun out into a new company.
Paramount was unhappy and launched an all-cash tender offer to purchase the entire company for $30 per share. The Ellison family backed the deal; Larry Ellison is the CEO of Oracle and one of the richest people in the world. Warner Bros. once again rebuffed the deal, and Paramount then sued the company and announced plans to wage a proxy battle against the Warner Bros. board of directors.
NASDAQ: NFLX
Key Data Points
Given that Warner Bros. stock trades at $28.40 as of this writing, some analysts are expressing caution. Of the 15 Wall Street analysts who have issued research reports on Warner Bros. in the past three months, five recommend buying the stock, and 10 say to hold it, according to TipRanks. However, the average price target implies nearly 10% downside.
Earlier this month, Guggenheim analyst Michael Morris downgraded the stock from a buy rating to neutral but lifted his price target to $30 per share. In his note, Morris highlighted that the stock has "limited upside," acknowledging that it could take a while for any deal to close and that there are still approval risks. I would agree with Morris here.
Investors who bought the stock several months ago have seen tremendous gains. The stock now trades over Netflix's offer price and not far from Paramount's, so I don't see much left here.
Does the steep sell-off in Netflix present a buying opportunity?
While Warner Bros. has seen its stock melt up, Netflix has gone in the opposite direction, down 30% in the past six months. Investors often aren't fans of big acquisitions like this, especially since Netflix isn't an experienced acquirer. The acquisition will require Netflix to take on significant debt, eroding the company's financial position.
There is tremendous execution risk for a deal like this, not to mention the drama with Paramount and potential antitrust regulatory risks. Still, most Wall Street analysts see this latest dip as a buying opportunity. Of the 38 analysts who have issued research reports on the stock in the past three months, 26 have a buy rating, 10 hold, and 2 sell, according to TipRanks. The average price target among the analysts suggests nearly 40% upside.
NASDAQ: WBD
Key Data Points
Oppenheimer analyst Jason Helfstein recently reiterated his buy rating on the stock, lowering his price target from $145 to $125, which still implies significant upside. In his note, Helfstein said there are very few, if any, catalysts for the stock until the pending deal with Warner Bros. closes. He also said that there won't be share repurchases while the deal is pending.
I remain bullish on Netflix long term. If the deal doesn't go through, it would be a waste of time, money, and resources, but Netflix has already shown it can execute on its own, with strong subscriber growth and subscription price increases. If Netflix successfully closes the deal, I believe the combination of HBO's great content and Netflix's technology and marketing prowess will create a winning combination.
