Oct 15, 2019 - Economy & Business

Media streamers wrestle with high debt loads

Data: Moody's; Chart: Axios Visuals
Data: Moody's; Chart: Axios Visuals

Streaming companies are accruing more debt to sustain heavy investments in content, and their leverage is historically high.

Why it matters: While most analysts agree that the debt loads at these companies are manageable for now, some firms are beginning to feel investor pressure to manage rising debt before it gets out of hand.

  • Leverage in one sentence: The ratio of a company's debt to its EBITDA — earnings before interest, depreciation and amortization.

Driving the news: Under pressure from activist investor Elliot Management, AT&T said Wednesday it will sell its wireless and wired assets in Puerto Rico and the U.S. Virgin Islands for about $2 billion to Liberty Latin America.

  • AT&T said in the announcement that it would sell $6 billion to $8 billion worth of assets this year, but this deal puts the total at $11 billion.
  • “They might have surpassed their own goal. They have probably not surpassed Elliott’s goal,” Roger Entner, founder of Recon Analytics told Axios' Margaret McGill.

AT&T is in a precarious position, argues Jonathan Chaplin, an analyst and Managing Partner of New Street Research.

  • "AT&T has the lowest leverage of the four (Comcast, AT&T, Disney and Netflix), but they also don’t grow EBITDA."
  • There have been mixed reports about whether the company wants to dump its DirecTV satellite business, which it acquired for $67 billion in 2015.
  • Offloading the asset could alleviate some of the pressure from Elliot. But a paltry price point could prove Elliot's point about the company's mismanagement.
  • Private equity giant Apollo Global Management has pitched AT&T to buy the satellite company, Fox Business reports. But it's unclear for how much.

For Comcast and Disney, the trajectory is much more optimistic. "Some companies can justify debt because they have defensible niches and stable cash flow," says Michael Pachter, a research analyst at Wedbush Securities.

  • "Companies like ATT, Disney and Comcast are unlikely to see a lot of volatility in their free cash flow (if they decline, it will be a slow process), so lenders are willing to advance funds based on a free cash flow multiple."
  • "Disney and Comcast generate lots of cash and they are growing profits at a quick pace.  Their leverage will fall quickly," says Chaplin. 

Netflix, on the other hand, has seen its free cash flow dwindle this year. And as a result, its leverage is the highest compared to many of its streaming rivals and high compared to the industry average. (See chart above.)

  • The company, which will spend roughly $15 billion on content this year, is the only company of its major streaming rivals that isn't profitable. It relies on the debt markets to fund its growth.
  • "Ultimately, they are going to have to generate free cash flow to pay back their $12.6 billion of debt, and it looks to me like they will be close to $20 billion in debt before they get there," says Pachter.

What's next: Netflix is under increasing pressure to grow its user base if it ever hopes to offset its massive debt.

  • Investors are looking for international subscriber growth when it reports earnings Wednesday to offset any threats from rival streaming services that are set to launch later this year and next.
  • Its stock has taken a beating after the company reported weak Q2 user additions.

The bottom line: The thing that Netflix has going for it is that businesses that is "genuinely raising debt to face the shift in distribution models," argues Chaplin.

  • It's for that reason that investors remain bullish on Netflix, despite the fact that it's burning tons of cash.

Go deeper: How Netflix burns $10 million a day

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