Story from Variety:
Four years ago, David Zaslav clinched a debt-heavy deal to merge cable mainstay Discovery Inc. — which he’d run since 2006 — with what was then called WarnerMedia. The story he told investors was that the two entities’ diverse array of media assets “are better and more valuable together.”
He doesn’t believe that anymore.
On June 9, Zaslav announced a plan that he had already signaled to Wall Street was coming: Warner Bros. Discovery would be breaking up. The move, expected to be completed by mid-2026, will create two separate public companies. The goal is to boost the value of the high-growth streaming and studio biz by amputating the declining TV arm that has been hurt by the shrinking pay-TV universe, while freeing up both companies to seek potentially value-accretive M&A deals. “The right path forward became increasingly clear,” Zaslav said on an investor call about the split.
Warner Bros. Discovery Streaming & Studios, to be led by Zaslav, will house HBO and HBO Max; TV and film production Studios; Warner Bros. Games; and consumer products, experiences and licensing. Warner Bros. Discovery Global Networks, headed by CFO Gunnar Wiedenfels, will comprise cable nets including CNN, TBS, Discovery and Food Network; TNT Sports in the U.S. plus Bleacher Report; free-to-air networks in Europe; and the Discovery+ streaming service (which is mostly tied to the cable properties).
Zaslav and Wiedenfels are following in the footsteps of the Comcast/NBCUniversal crew, which for similar reasons has set in motion the spinoff of Versant, the cable-net vessel (sans Bravo) set to sail by the end of 2024. But really, the handwriting was on the wall for Warner Bros. Discovery even before it took a whopping $9.1 billion charge against earnings for the devaluation of its cable assets in Q2 of last year
Will the unwinding of Warner Bros. Discovery work? Here are the key burning questions.
Are investors buying the spiel?
Signs weren’t great out of the gate. After Warner Bros. Discovery stock popped as much as 13% on the split-up announcement, shares ended down 3% for the day on June 9. It’s bounced back since then, up 5% compared with the June 6 closing price. But since the Warner Bros. Discovery deal closed in April 2022, the stock has slumped nearly 60%, erasing more than $35 billion in market capitalization. Note that stockholders just last week expressed disapproval with Zaslav and other top execs, with 59% of shares voted at the 2025 annual meeting rejecting their pay packages in a symbolic rebuke (because the vote was merely “advisory”). Meanwhile, S&P Global Ratings on May 20 downgraded Warner Bros. Discovery’s debt to junk status, citing a lower 2025-26 revenue and earnings forecast for legacy TV. Altogether, the urgency may have been building for Zaslav and Co. to act sooner rather than later.
--What’s the upside for streaming and studios?
The consensus is that this side of Warner Bros. Discovery’s business will benefit from being untethered from legacy cable. Max (soon to revert to the HBO Max name) has been riding high thanks to HBO hits like “The White Lotus” and “The Last of Us,” while Warner Bros.’ film studios have delivered strong box office results with “A Minecraft Movie” and “Sinners,” with James Gunn’s “Superman” coming this summer. Warner Bros. Discovery’s overall streaming business ended Q1 with 122.3 million subscribers, and the company is forecasting 150 million worldwide by the end of 2026 — a far cry from Netflix (300 million as of December 2024) but still a reasonably scaled and profitable business.
As a stand-alone company, Warner Bros. Discovery Streaming & Studios will be “more attractive to both the public markets and potential partners,” MoffettNathanson analysts led by Robert Fishman wrote in a June 9 research note. “Splitting them from the declining (but still cash-flow generating) linear assets may be the best path for Warner Bros. Discovery to unlock the greatest value of its portfolio.” The rough calculations by the MoffettNathanson team are that the stand-alone streaming and studios business will see “at least a low-double digit” price-to-earnings ratio, while the Warner Bros. Discovery networks company “should hold a mid-single digit multiple.”
Will this spur mergers or acquisitions?
Not anytime soon, obviously. But Zaslav has voiced a hankering to see streaming consolidation in the industry. After Trump’s election, he said the administration “may offer a pace of change and an opportunity for consolidation that may be quite different” and that it may “provide a real positive and accelerated impact on this industry that’s needed.” If and when Paramount Global closes its Skydance Media merger, there might be a tie-up to explore between Paramount+ and HBO Max, for example. Meanwhile, a stand-alone Warner Bros. Discovery networks company could attract the interest of a strategic or private-equity buyer: Like NBCU’s Versant, it’s a reliable cash generator for the time being despite the secular decline.
What happens to Warner Bros. Discovery’s debt?
According to Warner Bros. Discovery, the majority of the debt load — standing at $34 billion in net debt as of the end of March — will remain with the linear TV company. It also announced a $17.5 billion bridge loan to help tide it over until the split occurs. The devil’s in the details here: It’s unknown how the debt would be divvied up and what the terms would be. Warner Bros. Discovery claims both companies “will have a clear path to de-leveraging,” with “significant cash flow” and strong liquidity through cash and revolving credit. And the company says the linear networks spinoff will have “up to a 20% retained stake” in Warner Bros. Discovery Streaming & Studios that will help it efficiently pay down debt. But that’s predicated on an enhanced valuation for the Streaming & Studios entity, and right now the size of such a lift is still an X factor.