For months, Hollywood has been guessing how Shari Redstone would play her cards to sell control of her once-sprawling Paramount Global empire. The potential breaking apart of a historic studio, the procession of suitors, the thousands of employees on edge and eventual inking of a multibillion-dollar agreement to merge Paramount with the relatively upstart Skydance Media founded by a deep-pocketed heir, David Ellison, has kept executives and producers wondering what’s next (a “ go-shop ” window ending Aug. 21 is the next deadline).
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But soon enough, the M&A rumor mill may start to shift back over to Burbank, where Warner Bros. Discovery has been facing its own questions about whether its asset mix — born of a $43 billion spin off of Warners properties from AT&T to Discovery in 2022 — makes sense in a shifting entertainment landscape where a collection of linear cable brands like TNT, TBS, HLN etc. are ill-suited to rapid cord-cutting and an industrywide march toward streaming.
In April, a two-year Reverse Morris Trust lockup window for M&A involving the company quietly passed and, days ago, CEO David Zaslav was in Sun Valley talking up the potential for the next presidential administration to have an “opportunity for deregulation, so companies can consolidate and do what we need to to be even better.”
On Tuesday, a team of Wall Street analysts at Bank of America threw more kindling on the speculative M&A fire in a report that suggests that the “status quo” at Warner Bros. Discovery, where the stock price is down 30 percent year-to-date, isn’t cutting it. The “current composition as a consolidated public company is not working. At current levels, we argue that exploring strategic alternatives such as asset sales, restructuring and/or mergers would create more shareholder value vs. the status quo,” the report, led by BoFA’s Jessica Reif Ehrlich, reads.
The report, titled “Is Unbundling the Answer?,” posits a few scenarios, including asset sales — BoFA thinks CNN, for example, could potentially be worth $6 billion if spun off — and also a potential merger or partnership with a broadcast network (Fox was bandied about by the analysts), which would be a prize asset to complement Warners streaming properties (like Max and Discovery+) and large portfolio of cable channels (HGTV, TruTV, TCM and more).
But the Bank of America team also spends time on a scenario that doesn’t involve an outright sale of the entire company or a streaming partnership or one-off asset sales — they suggest that Warner Bros. Discovery could spin off all its linear assets into a separate holding company saddled with an estimated $40 billion debt so that the core of the company (its Warner Bros. studios and direct-to-consumer assets) can return to growth.
“In this hypothetical scenario for potential restructuring, WBD could spin off the DTC and Studio assets to a new entity unburdened by the constraints of a high debt load, leaving the linear assets with a significant amount of debt on the remaining company,” the BofA report reads. (This suggestion reminds of how Rupert Murdoch split his empire in 2013 into what was viewed as higher-performing studio and TV assets like 20th Century and Fox News from his then-embattled portfolio of newspapers and book publishers that were seen as less of a growth stock.)
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In addition to housing WBD’s debt, the Wall Street team thinks that this new, spun off company comprised of linear TV assets could become a vehicle to roll up the rest of linear TV assets across the industry, noting that Disney, NBCUniversal and AMC Networks and others have channels that they could shed.
“Many other companies are faced with similar dynamics as WBD but struggle to find adequate alternatives as there aren’t many buyers for these secularly declining assets,” the BoFA analysts write. “As a standalone entity, this Linear Spinco Asset could potentially become a ‘roll up’ for other similarly distressed assets-likely at attractive valuations.”
The appeal of a holding company to scoop up declining linear TV assets across Hollywood (and, presumably, free up studios to make a better pitch to investors as “pure-play” content companies) may be clear enough to the companies themselves, at least. Major pay TV providers collectively lost about 5 million subscribers last year, according to a Leichtman Research Group tally, accelerating from about 4.6 million subs lost in 2022.
Whether that’s something that’s realistic — or even whether it would be considered by top brass at Warners is another issue entirely. “An option like this would clearly be a last resort, but given where shares are currently trading and have been for the last year, we believe we are approaching the point where it is worthy of consideration,” the BoFA analysts wrote in the report.
Warner Bros. Discovery, which was trading around $7.80 on Tuesday, reports its second quarter earnings on Aug. 7.
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