Beleaguered Netflix (NFLX, NASDAQ, 52 week range 52.81 – 133.43) saw its share price surge after it was revealed that well-known investor Carl Icahn had amassed a 10-percent ownership in the company. The news came as the NYSE began trading after a two-day closure due to Hurricane Sandy. Netflix’s shares jumped up 20 percent, to as high as $84 per share, before ending the trading session at $79.24, up about 15 percent for the day on heavy volume.
Icahn told CNBC, “I’m buying it because it’s undervalued. I believe there is a secular change in the media industry, and consolidation in this space makes sense.”
So who would be the potential buyers of the company? The names that are tossed around all have the wherewithal, i.e. cash. They are Google with $45 billion in cash, Apple with $29 billion in cash and Microsoft with $66 billion in cash, and Amazon with just $5 billion in cash. Amazon has the least amount of cash, but it is thought of as the most likely purchaser. According to an analyst at Wedbush Securities, “Instead of spending billions on content, Amazon should just buy Netflix and get the synergy and scale.”
As far as the valuation you can look at the recent sale of 10 percent of Hulu. Providence Equity Partners sold its stake in Hulu for $200 million, giving Hulu a valuation of $2 billion, or approximately $1,000 per paid subscriber. Netflix is currently trading at a market capitalization of $4.5 billion, or about $100 per paid subscriber. Granted, they are just as much different companies as they are same, but if Netflix could get just $200 per paid subscriber it would be a good payday for Icahn.
Icahn’s intentions were confirmed in a 13-D filing with the Securities and Exchange Commission (SEC), a required filing when an investor amasses more than a 5 percent ownership in a publicly traded company. In the filing it stated, “The Reporting Persons (Icahn) acquired the Shares with the belief that the Shares were undervalued due to the Issuer’s dominant market position and international growth prospects. The Reporting Persons believe Netflix may hold significant strategic value for a variety of significantly larger companies that are engaging in more direct competition with one another due to the evolution of the Internet, mobile, and traditional industry. The Reporting Persons are considering ways for the Issuer to maximize shareholder value but have reached no conclusion. The Reporting Persons may in the future seek to have discussions with the Issuer.”
What is also significant is that Icahn’s ownership stake is mostly comprised as a call option for the shares that expires in two years, telling us that he expects some kind of deal to be made within that period of time.
Netflixs has seen some tough times in the last 16 months when its share price hit an all-time high of $305 per share. It has been a freefall ever since with disappointments in its streaming business and increased competition.
Icahn also told CNBC that he is “a movie buff, but I haven’t been to the movies in almost six months.” Maybe he is a Netflix subscriber.