- Netflix continues with debt adventures, proposes a $1.5 billion offering of senior notes.
- Music streaming is trending; Tencent Music is planning an IPO that could exceed $25 billion.
- EVs continue to garner attention as Chinese battery maker, Linsen, plans to open an European Office.
Neflix proposes more debt
Netflix (NFLX, Financial) today announced that it plans to offer senior notes, amounting to an aggregate principal amount of $1.5 billion. The terms of the offering will be agreed between the company and potential institutional buyers. Proceeds will be used for the purpose of, among others, content acquisition. This is Netflix’s second debt offering in a span of less than a year. The company raised $1.6 billion through debt financing last year.
This development consolidates the view of content-intensive nature of the leading content streamer. Netflix is on its way to spending $8 billion on content during the year. Debt is mounting up, as the latest offering will bring the tally of debt to $8 billion while increasing the cash balance to around $4.32 billion. Given the approximately $2 billion in operating cash outflow during year ended 2017, the latest offering gives Netflix a breathing space of two years for aggressive content acquisition. Note that the company is expected to stay cash flow negative during the next couple of years.
Point of Interest
Debt will reach around three times the amount of equity in Netflix’s capital structure as a result of the offering.
A constant increase in debt will magnify returns of equity holders while increasing the financial risk of the company. Moreover, the percentage of debt financing of the business will increase to 74% as compared to only 26% by equity offering.Moreover, the company has to pay back $1.3 billion in interest and principal amount in between the next three years alongside supporting content growth. What’s alarming is that current content obligations stand at $7.9 billion, meaning that the company has to pay $7.9 billion to content creators during the next year or so. Given $4.32 billion in cash and a mere $1 billion in expected earnings during 2018, financial risks are getting material for Netflix.
Another streaming IPO bodes well for Spotify
Tencent (TCEHY, Financial) Music, the Chinese music streaming counterpart of Spotify (SPOT, Financial), is planning an initial public offering, reported the Wall Street Journal.The IPO could be worth as much as $25 billion and is expected to be one of the largest IPOs of the year, according to some reports.
The company has started to weigh its underwriting options and will interview banks over the next month. Although the U.S. is likely to be the home for IPO, Tencent has not yet made a final decision in this regard. It is worth mentioning that Tencent serves music to around 700 million users while monthly active users (MAUs) of Spotify linger around 170 million.
Nonetheless, $25 billion seems a bit too ambitious given that Spotify acquired a $1.2 billion stake in Tencent music recently, putting the total value at $12.3 billion. Note that Spotify owns 10% of Tencent based on the $12.3 billion valuation of Tencent Music. On the other hand, Tencent holds around 7.5% of Spotify.
Point of Interest
Tencent Music isn’t competing against Spotify, which creates problems for Apple (AAPL, Financial) Music and Alphabet (GOOG, Financial)'s Play Music
Although Tencent controls more than 75% of the music streaming market in China, it has little presence outside of China. The company captured 78% of the music streaming revenue in China during last year, thanks to the acquisition of QQ Music, Kugou and Kuwo. Due to the cross ownership between Spotify and Tencent, both companies are exposed to global streaming prospects while Apple Music and Google Play Music can only struggle to enter the Chinese streaming market. Spotify will also benefit in case of a successful IPO of Tencent music amid potential cash injection from Tencent due to a higher IPO valuation.
Competion is catching up on Tesla
Tianjin Lensen, a battery produced from China, is thinking of opening a sales office in Europe. Reuters reported that a company official disclosed that Linsen is in talks with European automakers to supply batteries for electricity powered vehicles (EVs).Ă‚ Volkswagen (VOW, Financial) and Daimler (DAI, Financial) are reportedly in talks with Linsen, noted Reuters.
Lensen’s ambitions to set up a sales office in China might relate to Volkswagen’s potential $25 billion investment in battery cells. The company is planning to spend this amount to procure battery cells to make more than 500,000 EV packs per year at the Brunswick factory.
Large automakers are warming up to the idea of EV. This is evident from the urgency of big European automakers in EV development. Volkswagen plans to produce 3 million electric cars per year by the end of 2025 and market 80 new models. The company has already identified 16 sites that will be used to achieve the 3 million feat.
Point of interest
Volkswagen battery production ambitions require at least four gigafactories; Tesla (TSLA, Financial) has one for EV battery production.
Tesla is targeting 3 million EVs a year by 2020 while Volkswagen in targeting 3 million a year by 2025. Unlike Tesla, Volkswagen has a realistic plan in place with 16 production locations and an estimated 150 gigawatt-hours of battery production needs. For reference, Tesla is planning to produce 50 GWh from its Gigafactory by 2020. The company will need at least two more factories to match Volkswagen for EV production by 2025.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
