Why Shares of Netflix Are Sinking After the Company Announced a Huge Acquisition

Shares of the streaming giant Netflix (NASDAQ: NFLX) had fallen nearly 3.7%, as of 1:52 p.m. ET today. The company sent shockwaves through the market after it announced what would be an industry-rattling acquisition, if approved.

Major consolidation of the streaming industry

Netflix announced this morning that it has entered into an agreement to acquire Warner Bros Discovery (NASDAQ: WBD) for an enterprise value of $82.7 billion, $72 billion of which represents the equity value. The deal includes the assets of HBO and HBO Max. Shares of Warner Bros surged 5.4% higher, as of this writing.

Image source: Getty Images.

The deal values Warner Bros at $27.75 per share, $23.25 of which will be paid in cash, with the remaining in stock. To fund such a big acquisition, Netflix has secured a $59 billion bridge loan from major Wall Street banks, which will eventually be replaced with various debt instruments such as corporate bonds, term loans, and revolving credit facilities, according to Bloomberg.

Interestingly, Reuters, citing anonymous sources, reported this morning that it is unclear whether Netflix will be able to materially expand its market share with the acquisition, as there is reportedly heavy overlap between Netflix and HBO subscribers. Additionally, Reuters reported that the deal is expected to lower streaming costs for subscribers, as Netflix will look to bundle its services with HBO Max.

There are also concerns regarding whether regulators will approve an acquisition between two leaders in the streaming space due to antitrust concerns. CNBC reported earlier today that the Trump administration is looking at the deal with "heavy skepticism," citing a senior official in the administration.

Is the deal good for Netflix?

In the near term, I think Netflix's stock could struggle a bit. The company is paying a massive price and taking on a mountain of debt to finance the acquisition; the extent of subscriber gains is unclear; and regulatory approval is not a given.

Longer term, the deal, if approved, could ultimately prove very positive. Netflix is acquiring some huge franchises with HBO. Additionally, I suspect that as consolidation in the streaming space continues, the company will be able to increase subscription prices while still saving consumers money compared to what they are currently paying for multiple streaming subscriptions.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.