Netflix cash position puts M&A into frame

The $220bln company behind hits such as “Tiger King” and “The Queen’s Gambit” said it expects to break even in terms of free cash flow this year

  
Small toy figures are seen in front of diplayed Netflix logo in this illustration taken March 19, 2020.

Small toy figures are seen in front of diplayed Netflix logo in this illustration taken March 19, 2020.

REUTERS/Dado Ruvic/Illustration

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

NEW YORK  - One of the biggest concerns about Netflix has been its uncanny ability to burn money. That’s about to change. The streaming service led by Reed Hastings and Ted Sarandos will be in a better position to defend its turf and even go shopping just as competition intensifies.

The $220 billion company behind hits such as “Tiger King” and “The Queen’s Gambit” said on Tuesday it expects to break even in terms of free cash flow this year. It generated $2 billion of it in 2020, but that was largely because the pandemic dramatically reduced production and marketing costs. A better indicator is 2019 when Netflix blew through more than $3 billion.

Higher subscription fees and more than 200 million paying customers explain some of the improvement. The need to spend, especially on original programming, to keep people watching is only going to grow, however.

Walt Disney DIS.N has started a formidable competitor and owns a trove of intellectual property that allows it to crank out “Star Wars” and superhero sequels. The Magic Kingdom is targeting more than 100 new titles a year to be released on its flagship Disney+ service. AT&T’s T.N HBO Max and ViacomCBS’s VIACA.O forthcoming Paramount+ are also aiming to reach viewers directly by tapping their well-stocked Warner Bros and Paramount Pictures libraries.

With more than $8 billion in cash and little need to borrow for day-to-day operations, Netflix now has some breathing room. It said it might revisit buying back shares, but considering they are trading near an all-time high and the competitive landscape, a better use of money would be acquisitions to add to its slate of original movies and TV shows.

The MGM studio, which Reuters reported is exploring a sale, could be an attractive option because of its giant film archive that includes “Rocky” and “The Terminator,” as well as unscripted series such as one starring domestic doyenne Martha Stewart. Sony’s also could prove tempting if it ever decides to part with it. A book publisher also might provide a useful inventory of intellectual property.

Previous acquisitions for Netflix have been smaller ones, such as comic book publisher Millarworld. Its new financial position puts bigger deals into the frame.

CONTEXT NEWS

- Netflix said on Jan. 19 that revenue for the fourth quarter increased 22% from a year earlier, to $6.6 billion, after adding 8.5 million net new subscribers, more than the 6.1 million that analysts had been projecting, according to Refinitiv.

- The streaming service reported net earnings for the quarter of $542 million, or $1.19 per share, compared to $587 million, or $1.30 per share, during the same period in 2019.

- Netflix added that it expects free cash flow to break even in 2021 and that it no longer has a need to raise external financing for day-to-day operations.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Jeffrey Goldfarb and Amanda Gomez) ((jennifer.saba@thomsonreuters.com; Reuters Messaging: jennifer.saba.thomsonreuters.com@reuters.net))

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