Two Years After WarnerMedia Merged With Discovery, Debt and Megadeal Questions Loom
Georg Szalai
Warner Bros. Discovery stock analysts on two years after mega-merger, challenges, opportunity and M&amp;A.
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The Hollywood Reporter
Warner Bros. Discovery was officially created when Discovery and AT&T’s WarnerMedia closed their megamerger on April 8, 2022. Two years later, the entertainment giant, led by CEO David Zaslav, has integrated the two companies’ businesses and increased its cost-savings target from $3 billion to more than $5 billion.

But its stock has been under pressure as of late amid industrywide challenges, including advertising softness and cord-cutting, as well as a lack of financial guidance during its fourth-quarter earnings conference call. And chatter about possible M&A that the company could engage in is likely to surge now that the two-year Reverse Morris Trust lockup period for big deals involving WBD has ended.

As of noon ET on Monday, WBD shares were down around 25 percent for the year to date, from above $11 to about $8.50. And several analysts have since the company’s fourth-quarter earnings update lowered their stock price targets on WBD.

“We maintain our ‘neutral’ rating for Warner Bros. Discovery and price target of $11,” MoffettNathanson analysts Robert Fishman and Michael Nathanson wrote, noting some clouds overhanging the stock at this stage. “The stock continues to screen very attractive on a free cash flow yield (24 percent on 2024 estimates), but the uncertainty surrounding … forecasts still makes it challenging to recommend WBD stock to investors.”

Describing the first two years after the megadeal that created the new industry titan, the MoffettNathanson duo said: “It would be difficult to characterize the ride WBD has experienced in its first two years of existence as anything other than choppy. Between ever-worsening linear pressures, a streaming platform that has thus far failed to achieve critical scale, and a massive debt balance, the rocks in the water have been many, the rapids strong, and the path to safety narrow.” (Warner Bros. Discovery ended 2023 with 97.7 million subscribers across Max and Discovery+.)

No surprise, then, that the experts concluded: “There are potentially safe waters ahead on the other side of this time of turbulent transition. The question is, can management successfully navigate the many twists and turns needed to get there?”

The MoffettNathanson duo also highlighted the significance of April 8 for the broader media and entertainment M&A playing field given recurring mentions of WBD as a possible takeover target for Comcast/NBCUniversal or buyer of Paramount Global, among other scenarios.

“The company’s two-year anniversary present is the removal of Reverse Morris Trust tax handcuffs, freeing the company to explore significant reorganization and/or M&A,” the analysts noted. “Even with progress on DTC and studio profitability, management may still be forced to explore divesting assets in order to accelerate its debt reduction and unlock value.” And they warned: “Or it may become the subject of an activist campaign looking to break up the company. Still, $40 billion-plus of debt is a significant impediment for most outsiders.”

Last week, CFRA Research analyst Kenneth Leon cut his WBD stock price target by $1 to $9 and stuck to his “hold” rating, citing “a narrower risk premium.” He also pointed out such near-term pressures as adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) that is expected to be negative in the first half of 2024 before turning positive in the back half.

“The share price reflects less patience for WBD to achieve the transformation of its linear networks to Max,” the expert argued. The conglomerate’s direct-to-consumer (DTC) unit, which includes Max and HBO, eked out a slight profit for 2023, but he argued that investors will need more patience for clear financial upside. “We think accelerated growth and profits for Max video streaming may take longer,” he explained.

“Due to the actor and writer strikes, WBD faces lighter programming content in 2024,” Leon also highlighted, but noted: “WBD is committed to doing a better job with blue-chip movie franchises like Game of Thrones, Harry Potter, and Superman.”

Meanwhile, Bank of America analyst Jessica Reif Ehrlich had reduced her price objective for WBD by $3 to $14 in late February in a report titled “Resetting the Bar.” In it, she emphasized that WBD’s fourth-quarter 2023 performance reflected “the challenging environment as the business continues to be impacted by the secular headwinds in the linear business, a challenging advertising market, and the various strikes.” However, the Wall Street veteran maintained her “buy” rating on the stock.

The BofA analyst dove into various parts of the conglomerate’s business. “We believe WBD’s opportunity at DC is underappreciated,” she wrote, for example. “If successful, DC could be a critical driver in WBD’s turnaround.” DC success “has implications across multiple businesses, including film, DTC (via subscriber growth and engagement), consumer products, gaming, and experiences,” the expert emphasized. “Indications of a successful IP franchise can lead to share price appreciation. Disney outperformed the S&P 500 by about 24 percent over the course of the first five Marvel releases.”

Reif Ehrlich also called the cable networks “WBD’s content engine,” explaining: “WBD is leaning into using linear shows across Max, Discovery+ and FAST.” For her, that makes sense. “WBD’s cable networks produced nine of the top 10 unscripted freshman series and had 31 percent share in ad-supported cable in 2023, indicating the company’s prowess in popular content creation for linear TV,” she explained. “While this content starts on linear TV, much of it is utilized across Max, Discovery+ and FAST channels. As an example, WBD’s new documentary Quiet on Set premiered on linear TV and was simultaneously released on streaming, becoming the most watched streaming show in its first week. Amortizing content across multiple windows, typically linear content on streaming but occasionally streaming content on linear, drives improved return on investment on content spend.”

Finally, Reif Ehrlich highlighted upside opportunities for WBD’s news network brand. “We see opportunity for CNN to use the strength of its brand to find new areas of monetization and become a more modern news network,” she wrote. “Monetization can be some combination of DTC subscription, advertising through mainly direct relationships and brand campaigns, sponsorship and then new news-adjacent opportunities (e.g. Health and Longevity).”

Similarly, Guggenheim analyst Michael Morris in late February lowered his WBD stock price target by $2 to $12, while maintaining his “buy” rating.

“Our target multiple is a modest discount to the current 2024 average for ‘buy’-rated peers Fox, Disney, and Paramount, and reflects our incrementally cautious view on the company’s operating outlook, given that management lacked the visibility to provide formal guidance,” he wrote. “We continue to believe that the company’s core branded assets and the potential for incremental long-term growth of a combined streaming service will create shareholder value, though that view is tempered by our concern toward the ongoing economic pressure in linear television.”