Netflix take steps against hostile takeovers as industry mulls a sale

Michelle Clancy | 06-11-2012

With the collapse in Netflix investor confidence and market value over the course of the last 15 months, Netflix is looking to block a hostile takeover bid even as BTIG Research postulates that it could be time for the streaming leader to to hang out the for-sale sign.

Netflix, lately finding itself battered by Wall Street in the wake of revised subscription guidance for the fourth quarter, saw an uptick in share price after it was revealed that activist investor Carl Icahn had taken a 10% stake in the company. Icahn has a reputation for shaking up management and forcing sales, using his board seat within companies as leverage.

After Icahn told Reuters last week that he felt Netflix was undervalued and would make "a great acquisition for a number of companies," and that there would be a bidding war if it were ever up for sale, Netflix has taken an interestingly timed action with the implementation of a shareholder rights plan.

The company is issuing of one right for every share of common stock outstanding at the close of business on 2 November, which will trade with the company's common stock. A right allows its holder to buy one-one-thousandth of a share of a new class of preferred stock at $350 per right. They become exercisable if any one person or group acquires 10% of Netflix stock. The idea of course is to make it much more difficult for an outside entity to buy up shares in a hostile takeover bid.

"The Rights Plan is intended to protect Netflix and its stockholders from efforts to obtain control of Netflix that the Board of Directors determines are not in the best interests of Netflix and its stockholders," the company said in a statement.

Netflix is looking more and more like an acquisition target. It has spent a few quarters reeling from last fall's ill-thought-out decision to separate its subscription and DVD rental business and increase its rate plan by 60%--a move that saw its stock plummet from the $300+ top share price last summer. Netflix has a current market value of $4.4 billion, but aside from the rate plan issue, which also cost the company in churn before making up ground this year, the online streamer is facing escalating content fees and a so-far profitless international expansion, making for squeezed margins.

"It has been an awfully long last 15 months for Netflix," BTIG analysts said. "While Reed Hastings has successfully restored consumer faith in Netflix by bolstering serialised drama and children's content, investors remain skeptical of Netflix's prospects and of Hastings' leadership."

Investor fears center around five key areas: competition, content costs, the international expansion, Hastings' guidance missteps over the past year (his complete confidence in ending 2012 with more subs than HBO is now falling well-short), and the inherent risks/volatility associated with original programming like Arrested Development. The latter is "despite original programming holding the key in our view to tilting content negotiation leverage back toward Netflix, as well as an important subscriber acquisition vehicle, BTIG said.

The analysts noted that Netflix would mainly appeal to two types of companies: those who would offer Netflix as part of a larger entity or use Netflix to accelerate growth in another aspect of their business, to find revenues beyond a subscription fee to increase the ROI on Netflix's content spend. Or, a premium cable company who would view Netflix simply as a premium cable network, similar to HBO, Showtime or Starz, and who have TV production capabilities that could facilitate the ramp in high quality original programming, as well as the balance sheet and experience to help grow Netflix's business in other ways.

As far as Amazon, Google, Microsoft and Apple, a takeover just wouldn't make sense, BTIG said. "We have a very hard time understanding why any of these companies would spend billions to buy Netflix when you get all the benefits without the cost today, especially given Netflix's low margins," said the firm, referring to Netflix' ubiquitous embedded device strategy, which in theory helps sell those devices.

"Let's call Netflix what it is today: a premium cable network entering the third stage of its evolution (stage 1 is distributing other people's old content, stage 2 is distributing other people's new content and stage 3 is creating your own new content), which just so happens to be distributed via broadband (OTT, over-the-top) and which is trying to expand its network internationally," BTIG said. "In turn, we believe companies that are experts at creating and distributing content should have an interest in acquiring Netflix."