HYBRID VIGOR VOL 2 ISSUE 15: Sevens and Eights

Dear Friends,

Don Quixote had Lady Dulcinea. Captain Ahab had Moby Dick. Pip had Estella. Monty Python had the Holy Grail.  You get the idea.

We all have some kind of quest, perhaps unattainable, but we just won’t give it up.  For me, that quest is a multi-billion-dollar convertible issue by Netflix.

The stock is moving this morning on an upgrade and speculation, based on a request for a dramatically increased share count, of a major stock split.

Wouldn’t this be a nice time—once this week’s earnings have cleared—to bring that new deal?

The ideal convertible issuer has a lot of value (especially franchise value), but value that may be hard to quantify with traditional measures.  This adds to volatility and uncertainty.  You not only don’t know how the company will do, you don’t know how the market will view the results—even more than usual.

I’ve been in this game well over 20 years and I’ve never seen a company more tailor-made for our market.  I wrote about it last year in Forbes when the stock spiked.  It’s been up, down, and up again since then. We profiled the company in the On-Deck Circle a couple of months ago, suggesting a $1.5 billion deal with an 0.75% coupon and a 45% conversion premium.  

Now that the company appears to be getting ready to do something significant with its stock, I’ll ask again.  Netflix, do me proud. If anything, you could probably get even better terms now. We’re now talking a conversion price near $700 pre-split, even without any kind of antidilutive measures.  What’s so magic about $700? Well, it happens to be exactly ten times the stock price the last time Netflix sold equity, back in 2011.  Not that long ago.  And yes, we know Netflix sold a private convertible way too cheaply then as well.

New content and international growth won’t just pay for itself.    Who knows, if the market likes the next earnings report, we could be talking an $800 (pre-split) conversion price.  And we all know eight is a lucky number in China—where Netflix has got to be planning to go eventually.  Doing business in China isn’t cheap, but it sure helps to have a convertible market ready to finance it.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).