Warner Bros. Discovery Should Explore a Potential Sale or ‘Strategic Alternatives,’ Bank of America Says

Shares of Warner Bros. Discovery jumped over 7% during Tuesday’s trading session after a leading analyst with Bank of America said the media conglomerate could create more value for shareholders by exploring strategic options, including a potential sale.

“In our view, the current composition as a consolidated public company is not working,” analyst Jessica Reif Ehrlich wrote in a note to clients. “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.”

Since closing its merger in 2022, WBD has seen its stock price fall over 67%, driven by headwinds surrounding its linear business, last year’s Hollywood strikes and recent NBA media rights negotiations, which could see TNT Sports lose out to Amazon and NBC and potentially impact its next round of negotiations with distributors.

“At the time of the transaction, our bullish thesis was predicated on: (1) the unique and valuable assets underpinning the new company; and (2) WBD’s scale allowing the company to protect the secularly challenged linear business as their streaming service was ramped and the studio reinvigorated. While several financial assumptions behind the combination of Warner Media and Discovery have not materialized, we still believe several of WBD’s assets are best in class with tremendous unrecognized value,” said Reif Ehrlich.

In April, Warner’s two-year lockup window on M&A, known as a Reverse Morris Trust, expired.

Ehrlich laid out one hypothetical scenario in which WBD could spin off its linear assets with a “significant amount (if not all)” of its $40 billion in long-term debt, while allowing its direct-to-consumer and studio assets to grow as a standalone company.

The standalone linear business would be used to generate cash to service upcoming debt over the next several years and could also provide an opportunity to “roll up” other distressed linear assets held by AMC Networks, NBCUniversal and Disney at attractive valuations.

“While this would have a potentially devastating impact on the value of WBD’s debt, we believe a transaction such as this would be accretive to equity value,” she explained. “In essence, this scenario would be a significant transfer in value from debt holders to equity holders. Moreover, while the optics of this are clearly not ideal, and the risks are significant, the nature of WBD’s investment grade debt (covenant lite) offers this as a realistic potential option.”

Ehrlich acknowledged that the option would “clearly be a last resort,” but pointed out that “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.”

WBD could also pursue asset sales or an outright sale, though Erlich argued that there “appears to be a small buyer universe for the entire company given its size/complexity, and asset sales could take a long time to play out and would raise execution risks.”

Bank of America estimated that CNN could be worth $6 billion if potentially spun off, while Warner Bros. Games could be worth $5.6 billion and Poland’s TVN could be worth $3.5 billion.

Another possible option would be a joint venture or merger with another streamer or merging with a broadcast network. CNBC previously reported that the company was interested in a potential streaming partnership with Paramount+. The company is also teaming up with Fox and Disney on Venu Sports, a sports streaming joint venture slated to launch this fall, subject to regulatory approval, which will offer the option to create a bundle with Disney+, Hulu or Max.

Though Ehrlich said a broadcast network merger would make “strategic sense” and likely come with premium sports rights to help protect its linear business and grow streaming, there would be uncertainty around finding a willing seller and questions around WBD’s ability to finance a transaction given its high debt load and low stock price. She also argued that it is unclear if a Max JV/merger would be enough to stem the overall secular challenges in other areas of WBD’s business.

Bank of America’s pitch comes as Warner Bros. Discovery is set to report its second quarter earnings Aug. 7.

The firm expects that the company’s results could be impacted by a 9% decline in network advertising revenue and a 10% decline in network distribution revenue. It is forecasting total revenue of $9.9 billion and EBITDA of $1.88 billion for the quarter, mainly driven by cuts to the Studio segment.

It also anticipates that the Studio segment will be challenged due to “a continuing tough comparison related to Hogwarts Legacy and disappointing box office performance in the quarter and lower delivery of TV episodes,” and lowered its EBITDA estimate to $250 million from $580 million. However, it raised DTC EBITDA from a loss of $90 million to a loss of $50 million.

Bank of America forecasts that WBD will report $40.2 billion in revenue and $9.67 billion in EBITDA for full year 2025 and reduced EBITDA estimates for full year 2025 and 2026 by roughly $600 million each to reflect “the continued challenging trajectory of the business.”

WBD stock closed at $7.98 per share at the end of Tuesday’s trading session.

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