The news of the day for Amazon shares (AMZN) – Get the Amazon.com, Inc. Review Investors was the acquisition of MGM Studios. The e-commerce, cloud and media giant has agreed to pay $ 8.45 billion to own the company and its content library, which includes James Bond and “a treasure trove” of other legacy franchises.
The strategy behind the move seems clear: to compete better with providers like Netflix in the video streaming sector (NFLX) – Get the report from Netflix, Inc. (NFLX) and Disney (DIS) – Get the Walt Disney Company Report, while Prime Video becomes a more attractive lead generator for Amazon’s Prime offering. But is the M&A price putting pressure on Amazon’s finances?
Amazon and MGM: big numbers
The MGM takeover is the second largest in Amazon’s history and only follows the Whole Foods deal in 2017. In third place after the studio purchase is the takeover of Zappos in 2009 at a much lower price of “only” 1.2 Billion dollars.
The $ 8.45 billion paid for the content producer isn’t the only number that stands out. Amazon is giving up 37 times MGM’s estimated EBITDA for 2021, which values the assets acquired at a huge premium compared to the just-announced merger of AT&T and Discovery.
Can Amazon Afford MGM?
To fund the business, Amazon has (1) cash available, (2) borrowing options, and (3) stock issuance. As for the first option, the company currently holds $ 73 billion in cash. That pile of money alone would be enough to cover 8 acquisitions like MGM’s with pennies left.
Better still, Amazon’s dry powder was consistently replenished through cash flow generation. The following graphic shows how the operating cash flow (green line) has increased sharply in recent years with rising sales and margins – even if it was a bit bumpy on the way there.
With the second option, Amazon is no stranger to issuing debt. In fact, the company currently has nearly $ 32 billion in long-term debt, in addition to $ 53 billion in lease liabilities related to its fulfillment and data center facilities.
Because of the company’s size, solid balance sheet, and reliable cash flow, Amazon’s credit rating ranks high – FitchRatings awarded the tech giant’s debt an A + in May 2021. As a result, the Seattle-based company’s bonds should be ample market liquidity and inexpensive to service.
The table below, taken from sec.gov, shows that Amazon’s long-term debt has an interest rate barely 250 basis points higher than the yield on 30-year government bonds.
Finally, Amazon can fund its M&A activities either directly or indirectly through stock issues. The number of diluted shares has risen steadily over the past five years at least, from 465 million in early 2015 to 513 million today.
The $ 8.45 billion can be raised by issuing 2.5 million shares at the current market price. This would correspond to only 5% of the float that has been added since 2015. With Amazon stock’s high price and valuations, and given the market demand for AMZN stock, the company is likely to be able to fund multi-billion dollar businesses like MGM with just equity.
The Amazon Maven believes that the MGM Studios acquisition could be considered expensive compared to Amazon’s M&A history and given the valuation multiples. At the same time, the move seems strategic and affordable considering how well the e-commerce giant can fund the deal.
What do you think of Amazon’s acquisition of MGM Studios for $ 8.45 billion? Check out the Twitter poll below and share your thoughts on the deal.
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(Disclaimers: This is not investment advice. The author may be one or more of the stocks mentioned in this report. The article may also contain affiliate links. These partnerships do not affect editorial content. Thank you for supporting The Amazon Maven)