Icahn's Netflix Investment Raises Questions


Activist investor Carl Icahn has amassed a 9.98% stake in streaming TV service provider Netflix . The move has prompted mixed reactions from analysts and investors regarding Netflix ' s long-term prospects and business strategy. This is not surprising, given Icahn ' s history of stepping onto the boards of companies facing important turning points in their histories. BMI believes that , in this instance, the move will be positive for Netflix if Icahn pushes for Netflix to sell itself to a much larger player in the online video sector. However, the timing and valuation of any such deal must be weighed carefully.

Icahn paid US$168.9mn for 5.54mn shares and call options in Netflix, according to infor mation filed with the US Securit ies and Exchange Commission (SEC). In announcing the transaction, Icahn noted that Netflix - which has 25.1mn paying streaming video customers in the US and another 4.3mn subscribers in other markets, on top of 8.5mn paid subscriptions to its legacy DVD rental service - has a strong business model and a potentially significant strategic value for companies competing in the pay-TV space.

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Streaming Content Obligations (US$bn)

Icahn is well known for making highly targeted investments in high-profile companies and agitating for large-scale changes in their structure or business models. He is not averse to advocating the quick-fire sale of valuable assets and streamlining organisations to increase profitability to raise the value of his investments in the short term. These strategies repaid handsomely his investments in Time Warner , Blockbuster Video and Motorola ; among others; Blockbuster was acquired by DISH Network while Motorola Mobility was snapped up by Google , for example.

Netflix ' s customer addition rates in the US have been variable late ly as traditional cable- and satellite TV operators have responded to the competitive challenge by offering their own online services, either directly or in partnership with platforms such as Google-owned YouTube . There are also a number of competitive independent streaming video providers, such as Hulu . Meanwhile, Netflix's margins have been battered by a push into overseas markets, falling usage of its DVD rental service, investment in original programming and increased costs associated with the acquisition and distribution of content from leading providers. As of Q312, Netflix's total streaming content obligations were worth US$5bn, flat sequentially, but up by 22% y-o-y. Of that total, US$2.1bn is due within the next 12 months. Content providers will be keen to push for increased prices for each hour of content . T hey can point to Netflix ' s substantial global footprint to legitimise their claims.

BMI has long held the view that a time would come when the cost of serving its global footprint would outstrip Netflix's financial resources and that the business would either need to absorb one or more of its rivals , or be acquired by a much larger content producer or distributor. BMI believes that acquiring a rival in the streaming video market would add little value to Netflix and that selling itself to a global media company would be a better strategy as it would add value to the larger player's existing business.

Apple , Google, Microsoft , Amazon , Comcast , DISH/Blockbuster and Facebook have all been touted as potential suitors and Netflix would certainly fit well within these companies ' larger expansion strategies , which are fixated on selling multiple services to consumers via an entry-level portal. Apple, Google, Microsoft and Amazon are currently focused on using high-end hardware as a platform for the sale of content, with only Apple making a significant profit from the sale of the hardware. Cable TV operators such as Comcast and Time Warner Cable have struggled to interest consumers in their own online services and may see the purchase of Netflix as a short-cut to achieving that goal . H owever, such services undermine their core pay-TV operations, funded largely by advertising income.

With content rather than hardware or delivery infrastructure providing the best margins - if not the highest revenues - - BMI believes a global content producer would be ideally placed to acquire Netflix. France-based Vivendi is attempting to grow its high margin content business and is close to completing the acquisition of music producer EMI , while divesting capital-intensive non-core telecoms assets. BMI believes Vivendi may consider acquiring Netflix to broaden and diversify its reach into new media markets. However, Vivendi's deep-rooted financial troubles may preclude it making any such offer within the next 18-24 months, the timeframe BMI believes Icahn may have set to force through the sale o f Netflix. The Walt Disney Company is another credible suitor and is on an acquisition spree itself, having just announced the purchase of Lucasfilm for US$4bn . Disney owns the ABC Television Group and the ESPN sports channel; combining that with Netflix's well established business would be a sound strategic move and would attract the kind of financial offer that would appeal most to Icahn.

This article is tagged to:
Sector: Telecommunications
Geography: France, Global, France, United States, Global, Global, Global