Perhaps it’s the aftermath of big content deals or the expectations of more to come, but Netflix said Monday it is raising cash, and after-market traders are taking the revelation as a bad sign.
The company said in a regulatory filing that it will sell about $200 million in convertible bonds to Technology Crossover Ventures with an initial conversion price of $85.80 per Netflix share.
Netflix shares lost 5 percent to $74.47 on Monday, and the stock was down an additional 6 percent after the closing bell, sinking it well below its 52-week low.
Under the terms of the purchase agreement, Crossover has the right to nominate a Netflix board member. For now, Crossover has designated existing director Jay Hoag as its board representative.
The deal also calls for Netflix to sell $200 million in stock to “non-affiliated third parties,” so the company said late Monday that mutual funds and accounts managed by T. Rowe Price Associates will purchase about 2.86 million shares at $70 apiece.
It’s no secret that Netflix has had to spend a lot more recently for rights to stream TV shows and movies than it has had to in the past. Analyst MIchael Pachter estimates it could spend from $1.9 billion-$2.1 billion next year on content acquisition, up from $180 million last year. In it’s filing, though, Netflix only said it will spend the $200 million or so that it raises on “general corporate purposes.”
The filing also says that, “From time to time we evaluate potential acquisitions of or investment in businesses, technologies, or products that complement our business, although we have no present commitments or agreements to enter into any acquisitions or invesments.”
Pachter, the first analyst to weigh in on Netflix’s decision Monday, called it “bad to the point of desperation,” and said that managament isn’t doing smaller shareholders any favors.
“They will first dilute their existing shareholders by $200 million, then will issue the bonds to an existing shareholder, Crossover, with a very favorable option price,” he said.
“I think it’s save to say they are doing this to afford content,” Pachter said, “and their revenues are insufficient to provide enough cash to pay for their planned content acquisition costs.”
After reviewing Pachter’s comments, Netflix spokesman Steve Swasey said: “Netflix has no cash or general liquidity needs, and therefore we have no immediate plans to use this capital. We don’t think we need it, but it’s always nice to have more money than you need.”