As studios spend billions on content and Endeavor scraps its IPO, long-term obligations may weigh down strategic bets.
"When you allow a P&A credit, your only collateral is how a film performs," says the investment banker. Still, the sums involved with these firms are minor compared to the amounts that have gone to such behemoths as Netflix, Comcast and AT&T. As of June 30, Netflix carried debt of $12.5 billion, Comcast of $108 billion and AT&T of $170 billion, per SEC filings.
Currently, among the major entertainment companies, only Netflix falls into that bracket with a ratio of 4.4. Even so, says Abrams, "if a company appears to have a high amount of debt, it may be just fine servicing it. While Netflix may not have the hard assets [of Comcast and AT&T], the company can service its debt due to today's low interest rates — and it will be fine as long as it continues to improve its operating margins.
While many analysts think these corporations are relatively recession-proof — they believe subscribers will continue to pay for their services while cutting other expenses — each is continuing to spend exorbitantly, driven by the race to develop premium content. Still in question is whether new streaming platforms that are being launched by these conglomerates — HBO Max, Peacock, Disney+ — will be embraced by consumers.
"These big companies are looking at the cash they have on hand to sustain the content wars in a world where they have to pay dramatic amounts of money to secure their competitive positions," says the executive, "and they're looking for other ways to do it than by borrowing."
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