Netflix Inc., the video-streaming and DVD subscription service, agreed to sell $400 million in stock and convertible notes to bolster cash as it increases spending for online rights to films and TV shows.
Technology Crossover Ventures will purchase $200 million in zero-coupon senior convertible notes due 2018, and T. Rowe Price Associates Inc. funds will buy $200 million in stock, Los Gatos, California-based Netflix said yesterday in a statement.
The transactions suggest Netflix’s cash squeeze may last longer than it had anticipated, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles. The company needs to spend more to make its streaming content stand out against a growing list of competitors, he said.
“It’s essentially saying, ‘We expect to continue to have cash-flow problems for a long time,’” said Pachter, who has a “neutral” rating on the shares. “It’s a bad deal for shareholders and it looks desperate.”
Netflix fell 5.4 percent to $70.45 at 4 p.m. New York time, the lowest close since March 19, 2010.
The notes have an initial conversion price of $85.80 a share, according to a regulatory filing. Netflix agreed to sell 2.86 million common shares for $70 each. Proceeds will total about $397 million.
“Netflix is raising money now to strengthen the balance sheet,” said Steve Swasey, a company spokesman. “We have no cash or general liquidity needs, and therefore have no immediate plans to use this capital.”
In October, Netflix Chief Executive Officer Reed Hastings forecast 2012 losses because of costs to start service in the U.K. and Ireland. The company said free cash flow would lag behind net income for several quarters as it increased spending on content.
Netflix had $365.8 million in cash and short-term investments at the end of the third quarter, according to data compiled by Bloomberg.
Hastings has put further expansion on hold while seeking to contain a subscriber revolt over a price increase and an aborted plan to split its streaming and DVD-by-mail businesses.
To keep users and restart growth, Netflix is adding to its streaming library. The company said on Nov. 18 that it would offer new episodes of “Arrested Development,” a Fox comedy that was canceled in 2006 and is being resurrected for a limited run of television episodes and a movie. Netflix will have exclusive access to the new episodes beginning in 2013.
Also this month, the company acquired rights to films from Miramax, Metro-Goldwyn-Mayer Inc. and Lions Gate Entertainment Corp. for its U.K. service.
Netflix yesterday reaffirmed a forecast for “about flat” U.S. streaming subscriber additions after a decline in October.
“If we are unable to repair the damage to our brand and reverse negative subscriber growth, our business, results of operations, including cash flows and financial condition will continue to be adversely affected,” Netflix said in a separate filing for the common stock.
Morgan Stanley advised Netflix on the notes, and Morgan Stanley and J.P. Morgan Securities managed the stock offering.
Technology Crossover, based in Palo Alto, California, gained the right to name a Netflix director as long as it retains $100 million of the notes, according to filings. Jay C. Hoag, a co-founder of the venture capital firm, is already a Netflix board member, so the provision won’t lead to any immediate change.
T. Rowe Price Group Inc., based in Baltimore, provides investment advisory services.