Can Netflix Afford to Buy ViacomCBS?

Now that Amazon has announced it will buy MGM Studios and AT&T has spun its WarnerMedia assets into a venture with Discovery recently named Warner Bros. Discovery, the leading streaming company has been left without a marriage. Netflix Inc. (NASDAQ: NFLX) management must be trying to decide whether to use its balance sheet or common shares to make a deal to increase the size of its streaming library significantly.

Netflix has just over 200 million paid subscribers worldwide, which puts it about even with the count of rival Amazon. Other large media companies, particularly Walt Disney, have rapidly growing streaming businesses, and the market gets more crowded seemly by the week. One reason Netflix has done so well is that, as the oldest major company in the industry, it has amassed a library of content licensed from studios and television to go with its own original movies and series. Netflix has the chance to join the industry consolidation and make a huge addition to its program inventory.

There are not many partners left, if these are defined as companies with very large existing libraries that can be quickly added. ViacomCBS Inc. (NASDAQ: VIAC), the recent merger of two public corporations with TV, movie and cable content assets, is among those still standing alone.

Netflix has a market cap of $221 billion. Its revenue last quarter was $7.1 billion. It also has $8 billion in cash on its balance sheet. Net cash provided by operating activities last quarter was $777 million.

ViacomCBS has a market cap of $28 billion. It had revenue of $7.4 billion in the first quarter and free cash flow of $1.6 billion. It has $5.5 billion of cash. Its one disadvantage as a target is that its long-term debt is almost $18 billion. The primary reason its market cap is so low is that it has almost no streaming income, particularly when compared to Amazon and Netflix. Wall Street believes ViacomCBS cannot solve this problem on its own.

ViacomCBS has one possession that is priceless. It has over a dozen TV channels, led by Showtime, with a huge library from these that includes hundreds of shows, and it owns Paramount studios and its massive film library.

Netflix management has to be concerned about the attempt by competition to stockpile libraries. ViacomCBS is a reasonably priced way to help keep at or near the top of the streaming industry.

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