BREAKINGVIEWS-Wells Fargo puts on a costly show for Netflix

By Stephen Gandel

NEW YORK, Dec 5 (Reuters Breakingviews) - Now free from years of regulatory limits on its growth, Wells Fargo WFC.N is flexing its investment-banking muscles. The lender is leading a gigantic $59 billion loan to support streaming titan Netflix’s NFLX.O acquisition of much of Warner Bros Discovery WBD.O. Just as crucially, it’s backing a $29.5 billion chunk of that itself, among the biggest commitments by a single bank ever. It’s both a sign of boss Charles Scharf’s now-unbridled ambitions, as well as growing risk tolerance on Wall Street as it competes ever harder to win business.

Netflix’s pounce on WBD, if it can pass various hurdles like worldwide regulatory reviews, would marry two of the biggest competitors in streaming television, as well as Warner’s iconic film and television studios. Including debt, this will cost Netflix co-CEOs Ted Sarandos and Greg Peters $83 billion.

Winning the mandate to fund much of that price tag is a coup for Wells Fargo. The bank ranked ninth in both U.S. M&A and debt capital markets volume year-to-date, according to Dealogic. Scharf recruited JPMorgan JPM.N alumnus Fernando Rivas to grow the laggard investment banking practice a little over a year ago. His plan looks similar to the one that his alma mater used: leverage a large balance sheet to win mandates. Just look at the $20 billion JPMorgan underwrote for AT&T’s ultimately failed attempt to acquire rival wireless carrier T-Mobile. It’s far from guaranteed to succeed in all cases. Giant private credit funds have plenty of money to lend and are mostly in ever-further on Wall Street’s turf. Banks are hemmed in by strict capital rules.

Wells Fargo’s victory here, though, does show that the playbook can still work. It’s just expensive. The bank has offered what’s known as bridge financing, a temporary stopgap that will eventually be replaced with a melange of bonds and loans. Even after that distribution process happens, though, Netflix may well end up as Wells Fargo’s biggest corporate borrower. Granted, Scharf has a lot more freedom now that the Federal Reserve is no longer capping the lender’s assets. Yet this is a lot to commit in one place. It also further stokes rising competitive intensity. Bankers will find that winning a reward requires stomaching more risk.

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CONTEXT NEWS

Netflix said on December 5 that it had agreed to buy Warner Bros Discovery’s studios and HBO Max streaming service in a deal valued at $83 billion including debt. Wells Fargo is leading a $59 billion bridge loan to finance the deal.

Moelis is acting as lead financial advisor to Netflix, with Wells Fargo serving as additional financial advisor. Allen & Co, JPMorgan and Evercore are advising WBD.