Fox Outbid Netflix to Buy Roku, So Why Are Both Stocks Falling?

Fox Corp. (NASDAQ: FOXA) (NASDAQ: FOX) just made the biggest bet in its post-21st Century Fox history. On June 15, it announced a $22 billion cash-and-stock deal to acquire Roku (NASDAQ: ROKU) at $160 per share -- a 33.7% premium to Roku's closing price the day before reports surfaced. Roku founder Anthony Wood will join Fox's board when the transaction closes in the first half of 2027. The deal would give Fox access to more than 100 million streaming households and the advertising infrastructure that sits behind them. Strategically, it reads like a good deal.

The stock market rejected it immediately.

Why Fox is falling

Fox's stock price dropped 16.8% the day the deal was announced. By the following week, it had shed another 5.9% as investors continued to process the implications. The problem isn't the strategy -- it's the price and the capital structure required to execute it. The stock is down about 25% in the last two weeks.

Image source: Getty Images.

Fox is funding the cash portion through $12 billion in new debt, backed by committed bridge financing from Morgan Stanley. That is a lot of leverage for a company whose core business, live sports, Fox News, and Tubi, generates reliable but not explosive free cash flow. Fox currently carries a median analyst price target of $71, which sits well above its current price, but the debt load changes the risk profile of every projection made before the deal was announced.

Management's promise of $400 million in annual cost synergies and free cash flow accretion by year two sounds reasonable on paper -- but Fox shareholders are being asked to fund a transformation today for a payoff that arrives in 2029.

Why Netflix was watching, and why the stock is falling

Netflix (NASDAQ: NFLX) publicly denied making a formal bid for Roku. Semafor reported that Netflix conducted preliminary due diligence as part of the sale process led by Qatalyst Partners, but chose not to proceed. The antitrust calculus explains most of that decision. Netflix produces more original content than any other streaming platform. Owning the operating system that hosts other streamers would have created a conflict so obvious that regulators wouldn't have needed to think hard about it. Fox, whose primary streaming asset is Tubi, a free, ad-supported platform with no SVOD ambitions, is a structurally cleaner buyer from a competition standpoint.

There is also an irony in the outcome that Hollywood veterans would appreciate. Roku was incubated inside Netflix in the early 2000s. Netflix spun it off in 2008 because it feared owning hardware would alienate Apple and Samsung as distribution partners. Nearly 20 years later, Netflix tried to buy back what it once gave away -- and lost to a media conglomerate that was barely in the streaming business five years ago.

This reported failure sparked M&A anxiety among investors concerned about Netflix's shift away from organic growth. For investors in both stocks, Roku's outcome is a signal: The streaming consolidation era is moving fast, the prices are getting large, and the companies willing to take on debt to win are getting rewarded with distribution -- and punished by the market on deal day.

Micah Zimmerman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Netflix, and Roku. The Motley Fool has a disclosure policy.