TOP STORY
📉 Netflix Drops 8% After Surprise $83B Deal to Buy Warner Bros

✨ Last week we had one of the strongest weeks of the year, and this week the momentum continued as the market rebounded from the dip two weeks ago (when investors were spooked by the rising debt levels in big tech).

📈 Across the indexes:

• The S&P 500 rose +0.85%

• The Nasdaq 100 rose +1.01%

• The TSX fell -0.23%

✅ Nvidia also recovered a bit from it’s slump, rising 4% this week after shaking off some of the fears from Google’s TPU deal announcement with Meta (see the breakdown on that here).

🗞️ And while there were a lot of exciting stories this week, such as…

• SpaceX in talks for a potential IPO in 2026 (full story here)

• Sofi plunging 6% after announcing a $1.5B share sale (full story here)

• Meta jumping over 5% after announcing it would cut the Metaverse budget by 30% and acquire AI Wearable company Limitless

🏆 …one story dominated the headlines: Netflix’s ($NFLX) $83B blockbuster deal to purchase Warner Bros ($WBD), the largest M&A transaction since the pandemic.

📈 📉 On the announcement, Warner Bros stock jumped 10% and Netflix stock sank 3% (and ended the week down 8%) as investors worry about the deal’s high price and Warner Bro’s debt.

🤿 So let’s dive deeper into what’s going on with this deal, and what it means for Netflix stock and the other streaming giants moving forward…

🤝 A Breakdown of the Deal

🎬 According to its press release this Friday, Netflix is expected to acquire all of Warner Bros assets, except its cable business which will be spun off beforehand.

📋 Current Warner Bros shareholders will receive $23.25 in cash and $4.50 in Netflix stock per share, or about $28 per share in total.

🏆 Netflix was bidding against Comcast and Paramount on the deal and emerged as the surprise winner, with one analyst saying they had the Netflix-Warner deal at only a 5% likelihood.

🎯 If approved, the deal would give Netflix control of Warner Bros’ century-old film studio, HBO, HBO Max, and DC Studios, bringing iconic franchises like Harry Potter and Game of Thrones under the Netflix umbrella.

📊 The deal would make Netflix the largest streaming company in the U.S. (and many parts of the world) by far, with a 30%+ market share after adding HMO Max’s audience of 128 million subscribers, along with world class studios and theatrical distribution infrastructure.

🤔 As of now, Netflix doesn’t expect to merge HBO Max into its service and says it will continue licensing HBO content to other streamers, and may even follow Disney’s footsteps with Hulu in offering bundles of the two services.

⚔️ But even so, for competitors like Disney ($DIS), Paramount ($PSKY), and Amazon ($AMZN), this creates a massive new threat.

📉 Impact on the Stock

While Warner Bros jumped 10% to a share price of $26 (a slight discount from the purchase price of $28 per share to account for the risk of the deal falling through), Netflix investors weren’t as thrilled, with the stock falling 3% after the news and ending the week down 8%.

🤔 The deal is a perfect fix on paper, giving Netflix a premium library of IP and an expanded moat… so why are investors so unhappy?

😰 Well even before the deal, Netflix’s long term debt had soared to $14.5B, and with only $13B in cash, Netflix will have to raise tens of billions more debt to finance the deal, causing it’s debt-to-equity ratio to soar from 0.56x to 2.5x.

🔗 There are also a ton of integration risks, with Netflix’s data-focused culture potentially clashing with the traditional Hollywood culture. Especially in media, mega-mergers like this have a poor track record.

🎙️ According to one commentator:

🏛️ The Political Battle Ahead

Long-time Netflix supporter and CEO of Ritholtz Wealth Management Josh Brown also dramatically cut his Netflix position after the news, pointing to political risks:

❌ What Josh is referring to of course, is the risk of regulators blocking the deal, with many politicians like Elizabeth Warren already coming out as strongly opposed:

👀 Adding to the regulatory challenges, David Ellison, the owner of Paramount (who got beat out in the acquisition bidding war), is also the son of Larry Ellison - the second richest man in the world and a close ally of President Trump. In contrast, Reed Hastings, the co-founder of Netflix, donated to Kamala Harris.

🌍 And that’s without even considering European regulators, who are also expected to scrutinize the deal heavily given Netflix and Warner's massive international footprint.

😥 All this to say, the deal certainly has some regulatory challenges ahead, which will likely cause a lot of near-term uncertainty for Netflix.

☀️ The Bright Side

But while the short term is uncertain, if Netflix can deal with it’s new levels of debt and avoid integration challenges, the deal could lead to long term value for Netflix. Even Josh Brown, who’s selling most of his position, said on CNBC:

💰 Analysts and Netflix executives point to higher streaming prices and cost savings between $2-3B annually as reasons the deal could drive value.

Peter Cohan, a Forbes contributor, breaks down the probabilities as follows:

• 35-40% chance the deal is rejected by regulators

• 35-40% chance the deal completes but delivers bad results

• 20-25% chance the deal succeeds and accelerates Netflix’s dominance

🤑 And while according to Peter the deal succeeding is the least likely of the 3 outcomes, he notes that in that scenario the benefits of the deal could drive Netflix’s stock up 120% by 2030, so if the deal works it could be a home-run.

🏦 All right, now that we’ve covered the Netflix story, let’s turn our attention to the Canadian Banks. But first, a quick word from this week’s sponsor Purpose Investments.

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CANADIAN BANK EARNINGS
🏦 Canadian Banks Surge After Strong Earnings

🚀 Canadian bank stocks shot up big this week after a strong earnings across the board, with CIBC leading the pack, rising 4%.

🏦 Nearly every Canadian bank is now up around 30% this year, beating out tech companies like Apple $AAPL, and even Meta $META in performance:

• RBC ($RY) jumped +3.97%, up 30.45% year-to-date

• TD ($TD) jumped +3.87%, up 59.74% year-to-date

• BMO ($BMO) jumped +0.75%, up 27.51% year-to-date

• Scotiabank ($BNS) jumped +2.39%, up 28.49% year-to-date

• CIBC ($CM) jumped +4.40%, up 39.52% year-to-date

• National Bank ($NA) jumped +1.07%, up 30.87% year-to-date

💵 Every one of the banks beat estimates, with the Big Six collectively reporting $16.45 billion in profit for the quarter, up from $14.73 billion last year. So what’s driving the growth?

📈 Capital Markets Growth

📊 Like last quarter, capital markets revenue continued to soar, with CIBC’s capital markets profits jumping 43.8%, RBC up 17.4%, National Bank rising 30.8%, thanks to higher trading revenue and M&A deals starting to come back to life.

🚩 While increased provisions for bad loans on personal banking, and slow mortgage rate growth were red flags, these were more than offset by the soaring capital markets revenue which have risen from all the market volatility this year.

☁️ Uncertainty Remains

😰 The challenge is, with US-Canada trade relations, there continues to be a lot of uncertainty in the Canadian economy, which posts a risk for the banks.

According to many analysts, Canadian banks are “fully valued” meaning any shortfall in earnings could hurt the stocks.

💰 A Cushion of Capital, Lower Borrowing

💡 But while there is risk, Canadian banks are continuing to be cautious amid the uncertainty.

🛡️ The Big Six’s CET1 ratios (a way of measuring how risky a bank’s loans/investments are) averaged 13.6% this quarter, more than two percentage points above the Office of the Superintendent of Financial Institutions’s (OSFI) 11.5% requirement (higher = less risky)

📈 Capital levels have climbed to historic highs recently, from 9% in 2014 to 13.7% now, even after a period of heavy share buybacks, dividends, and more.

🎯 According to former Bank of Canada deputy governor Timothy Lane, this could be intentional, and banks may be “deliberately wanting the [capital] cushion” to pursue acquisitions or remain “cautious” against shocks in an uncertain economic environment.

🏦 For the banks, if the volatile markets continue to drive up capital markets revenue, they’ll continued to be sheltered from the shaky economy, but if momentum slows they could have to face the reality of slowdowns and struggles across their other business lines.

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FROM THE BLOSSOM COMMUNITY
⭐️ Featured Discussions this Week

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