Will a Breakup of Warner Bros Discovery Save Shareholders?

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24/7 Insights

• Reports indicate that Warner Bros. Discovery Inc. ( NASDAQ: WBD ) may be broken up.
• That may be the only way the failed merger can get out from under its debt pile.

The Financial Times reports that Warner Bros. Discovery Inc. ( NASDAQ: WBD ) may be broken into pieces to enhance shareholder value. The merger between the Warner assets of AT&T and Discovery, which created the company, never made sense. That deal was announced in April 2022.

The newspaper reports:

People familiar with the matter said chief executive David Zaslav was examining several strategic options, ranging from selling assets to hiving off its Warner Bros movie studio and Max streaming service into a new company unburdened by most of the group’s current $39bn net debt load.

Its stock is down by 32% in the past year. Shares of battered rival Walt Disney Co. ( NYSE: DIS ) are 13% higher. Both compare to a 23% run-up in the S&P 500.

What Went Wrong?

Warner Bros. Discovery is a mash-up of several divisions that barely fit together. HBO is one of the country’s premier cable content providers. Max is the company’s effort to compete with Netflix and Amazon Prime Video. Warner Bros. competes with the other legacy studios and original content from the big streaming companies. CNN competes with MSNBC, Fox News, and the legacy network news divisions. Most of the company's other divisions provide niche programming, primarily viewed on cable. The only “synergy” Warner Bros. Discovery created was the ability to enable layoffs to cut expenses.

Warner Bros. Discovery posts second-quarter earnings next month. The most recently reported quarter's numbers were ugly. Revenue fell 7% year over year to $10 billion. The company lost $966 million. It lost $1.07 billion in the same period a year ago. It ended the first quarter with $3.4 billion in cash and $43.2 billion of gross debt.

The odds are that Warner Bros. Discovery cannot get out from under its debt pile. A breakup may be the only solution.

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