Executive Summary

• Despite announcing and $80+ billion dollar acquisition that would add ~$70 billion of net debt to its balance sheet, Netflix’s benchmark Aug-34s and Aug-54s are trading a mere 1 bp wider on the day at time of publication. The reaction compares to our prior prediction that spreads would widen by 10-15 bp in the event of a deal announcement. Given that pro forma net leverage is half a turn higher than we anticipated, we think some incremental pressure on spreads is warranted.
• WBD paper fared worse than NFLX on the deal news, with the benchmark Mar-32s down ~1 pt and the Mar-42s off by ~1.75 pts on the day. We attribute the negative reaction to the fact that the market had hoped WBD would sell the entire business to Paramount Skydance. Unfortunately, we still do not know the ultimate fate of WBD’s existing bonds and believe the reaction could have been softened by reports that Paramount is not going away quietly. Our base-case is that WBD’s outstanding notes will travel with DG when the business is spun off in 3Q25. WBD’s Mar-32s now yield ~6.25%, which looks rich versus the VSNT Jan-31s (~6.5% yield to Jan-30 call). Although we see further downside for WBD’s notes if our base-case comes to fruition, we believe it is prudent to wait until there is further clarity on the group’s refinancing plans before adjusting our credit recommendation.
• Netflix strikes deal to acquire WBD’s Streaming and Studios business for $82.7 billion. Netflix and Warner Bros. Discovery announced today that they have entered into a definitive agreement under which Netflix will acquire Warner Bros., including its film and TV studios, HBO Max and HBO. The transaction is valued at an enterprise value of $82.7 billion, which equates to a ~30x multiple of our forecast 2026E EBITDA for Warner Bros., or ~16x when including the $2.5 billion of target synergies. Completion of the transaction will require: (1) approval of WBD ’s shareholders; (2) the separation of Discovery Global and (3) regulatory approvals. The transaction is expected to close within 12-18 months.
• Netflix aims to deleverage to levels commensurate with its current A3/A rating within 2 years after closing. The cash component of the transaction is ~$60 billion, excluding the assumption of $10.7 billion of net debt from Warner Bros., which Netflix plans to fund via ~$10 billion of cash on hand and ~$50 billion of new debt financing. On the call, CFO Spencer Neumann said that pro forma leverage will be elevated at closing, but the company has a “clear plan” to bring that back under rating agency targets for the current ratings within two years after closing. We estimate pro forma net leverage of ~3.0x at close, which compares to our prior estimate of ~2.4x. We forecast that Netflix will generate $10+ billion of FCF per annum, which should allow the company to reduce leverage by up to ~0.5x per year.