The entertainment industry is in the midst of a massive arms race where scale is the name of the game. The problem is, there aren’t enough blockbuster options out there to make it happen with any regularity, which helps explain why Disney pounced on 21st Century Fox when the opportunity arose. The move will have far-reaching implications on the entertainment industry, with the most immediate shaking up the streaming landscape against Netflix (NFLX). But that may not be the only major domino to fall in the near future.
Citi analysts Jim Suva and Asiya Merchant told Business Insider that there is a strong chance that Apple (AAPL) will look to acquire Netflix following President Trump’s corporate tax cut. They say there is a 40 percent chance of a deal happening as Apple looks to unload an abundance of international money after previous federal tax laws prohibited them from doing so.
“The firm has too much cash – nearly $250 billion – growing at $50 billion a year. This is a good problem to have,” Suva and Merchant told clients, per the outlet. “Historically, Apple has avoided repatriating cash to the US to avoid high taxation. As such, tax reform may allow Apple to put this cash to use. With over 90% of its cash sitting overseas, a one-time 10% repatriation tax would give Apple $220 billion for M&A or buybacks.”
According to them, a potential acquisition of Netflix would run about $75 billion. Recently, Apple has been preparing to launch itself into the streaming fray with its own original content, even setting aside a $1 billion production budget. However, the tech giant has remained mysteriously silent on how it would deliver such content to users. Perhaps this has been the plan the entire time.
“The thinking is that Apple could use a lot of these newfound funds to patch up and strengthen their current streaming media portfolio and offering to the market,” Jim Fosina, CEO of Fosina Marketing Group, told Observer in an email. “Netflix is seen as a major independent streaming video player in the market and would provide Apple with a major jolt in their offering. There is most definitely a strong fit here. This would be another step in the aggressive consolidation of the media business. It would also bring new attention and exposure of the Apple loyal base to this streaming video offering, which can only help both companies.”
Such a move would give Apple ownership of Netflix’s entire library of content, including its wide-ranging cache of popular originals. Apple would pair its own upcoming buzzy projects—such as Jennifer Aniston and Reese Witherspoon’s morning show drama and Steven Spielberg’s Amazing Stories revival—with Netflix’s existing offerings. More importantly, it would immediately give Apple arguably the biggest ownership and distribution hub of any content provider in the game. Netflix currently paces the field with nearly 110 million worldwide subscribers. Why try to slowly build your own platform that can eventually compete with market leaders when you can just cut in front of the entire line?
But before we start planning Apple’s digital coronation, there’s reason to believe this is all just an elaborate rumor. The company’s recent strategy, which focuses on less sexy acquisitions and more internal diversification, has proven successful. Why change now? Forbes contributor Karl Kaufman notes that Suva and Merchant “have nothing to lose” by making this claim. Their 40 percent estimate gives them a 60 percent scapegoat and he believes the deal strays too far from company behavior.
“Apple has already committed $1 billion towards creating new shows and their largest acquisition was buying Beats for $3 billion in 2014,” Kaufman wrote. “Why would they spend $75 billion to buy Netflix? It would be a desperation move that would raise a white flag and signal a major organizational shift in philosophy.”
Kaufman argues that such a merger is doubtful and that Citi likely knows that, but that the buzz generated from these comments will spur a bump in Netflix shares. There’s also potential government opposition to consider as well. However, it may simply just be too early to speculate either way.
“At this stage Apple has just announced their plans to repatriate the $220 billion and Netflix is just one of the many possibilities on what they could do with it. We’ll just have to wait and see as plans mature,” Mike Kelly, CEO of Kelly Newman Ventures, told us.
Neither Netflix nor Apple has made any public comments concerning a possible acquisition and analysts are clearly split on the matter. Are big things on the horizon or is this all just smoke and mirrors?
