Warner Bros Discovery’s CEO David Zaslav is facing a difficult choice that could make or break the company’s future.
Warner Bros Discovery is discussing a dramatic split of its assets to deal with its enormous $39 billion debt pile, several sources reported. The entertainment giant also received a full report from Bank of America outlining possible strategies to bring the firm back on its feet.
Sources familiar with the matter say CEO David Zaslav is considering separating Warner’s network and gaming segments, which hold most of its debt but generate the highest amount of cash. The company would therefore retain possession of its legacy studio and streaming businesses.
Selling its linear and gaming segments could be Warner’s “last-resort option”, BofA said. “In our view, 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 acknowledged this would be devastating for Warner’s shareholders, essentially giving up two fast-growing businesses to equity holders while keeping the large debt pile. BofA valued CNN and Warner Bros Games at roughly $6 billion each were they to spin off the original business.
A hard choice
In the first quarter of 2024, Warner Studio’s revenues dropped 13% to $2.82 billion, and an adjusted EBITDA of $184 million, down 70% year-on-year. The decline was mostly caused by a lack of production following last year’s WGA and SAG-AFTRA strikes. Some of Warner’s theatrical releases were box-office hits, including the latest installment of the Dune saga. The studio’s financials should improve next year as production levels ramped up.
Conversely, streaming profits grew 72% year-on-year to $86 million. Although a significant improvement from last year’s streaming losses, the segment still falls significantly short of its competitors, namely Disney+ and Netflix.
Network revenue dipped 8% to $5.13 billion with an adjusted EBITDA down 8% at $2.12 billion. Most analysts and industry members agree linear TVs and networks will gradually decline in favor of streaming.
Herein lies Warner’s difficult choice to make. The network segment generates billions in cash but is in decline, the studio and streaming segments generate little profit but are projected to grow. Spinning off the networks would make Warner bleed cash but eliminate most of its debt and remove a declining segment.
Zaslav reportedly considered merging the assets with a third party, similar to the recent Paramount-Skydance deal. However, Warner hasn’t received any meaningful offer yet.
Warner Bros Discovery will publish Q2 earnings on August 7th. The firm expects further network and studio losses and an overall EBITDA of $1.88 billion. Warner needs to address its deadly spiral before it spins out of control.
