Warner Bros. Discovery restructures as cable struggles, setting stage for deals
Warner Bros. Discovery announced a major restructuring Thursday, a preliminary step that could lead to the breakup of the battered media company.
Investors cheered the news that the company was separating its linear networks — including CNN, TBS, Food Network, Cartoon Network and HGTV — into a distinct unit within the company. The move comes after Warner Bros. Discovery took a $9-billion write-down in August to reflect the diminishing value of its basic cable channels.
The other half of the enterprise will be dedicated to producing movies and award-winning television shows and its newer direct-to-consumer businesses. This unit — called Studios & Streaming — will be comprised of the Burbank-based Warner Bros. movie and television studios, premium channel HBO and the Max streaming platform.
The move comes less than a month after Comcast announced that it would spin off its linear cable channels, including MSNBC, CNBC and USA Network, into a separate publicly traded company. Warner Bros. Discovery isn’t going that far — at least not yet — because it still heavily depends on the revenue that it receives from distribution fees for its cable channels.
Analysts point to the David Zaslav-led company’s expected loss of the NBA contract and underperformance in key business units during the last two years.
However, in a statement, the company acknowledged that the structure was designed for the company to be more flexible “to pursue further value creation opportunities for both divisions in an evolving media landscape.”
Both divisions will report up to David Zaslav, the company’s chief executive since his smaller Discovery programming firm combined with WarnerMedia in 2022. That merger burdened the company with debt — which still totals nearly $40 billion. The reorganization is expected to be completed by the middle of next year.
“Our new corporate structure better aligns our organization and enhances our flexibility with potential future strategic opportunities across an evolving media landscape, help us build on our momentum and create opportunities as we evaluate all avenues to deliver significant shareholder value,” Zaslav said in a statement.
Warner Bros. Discovery reaches an agreement for Comcast Corp. to continue carrying its cable channels, including HBO, TNT, CNN and Animal Planet.
Warner Bros. Discovery stock, which has been gaining ground in recent weeks after falling to a low of about $6 a share earlier this year, jumped 15.4% on the news to $12.49.
Zaslav and his team have been under pressure to make a bold move. In July, Bank of America media analysts released a critical report that argued for the company to spin off assets, including the studios or streaming services.
“We still believe several of WBD’s assets are best in class with tremendous unrecognized value,” Bank of America media analyst Jessica Reif Ehrlich wrote in a Thursday report.
Warner Bros. Discovery said in the statement that it expects “the new corporate structure to enhance clarity and focus, with each division positioned to deliver on its specific strategic and operational objectives.” The company also plans to tweak the makeup of its board, but it did not detail those plans.
“They can’t go on like this,” Bank of America analyst Jessica Reif Ehrlich said, referring to the lagging stock and string of missteps by Warner Bros. Discovery boss David Zaslav.
Analysts have noted that Warner Bros. Discovery’s basic cable channels would pair well with Comcast’s cable channels because both have prominent sports and news platforms. Comcast lacks popular lifestyle channels — the type that Discovery gobbled up through its 2018 acquisition of Scripps Networks, which folded HGTV, Travel Channel and Food Network into Zaslav’s company.
However, there could be regulatory hurdles in trying to combine MSNBC and CNN.
On Monday, Warner Bros. Discovery and Comcast announced a long-term distribution deal for Comcast to continue to offer Warner channels to its millions of Xfinity customers. The deal also kept HBO content flowing to Comcast’s British television service, Sky.
Analysts and some company insiders had recommended Zaslav sell CNN to pay down debt following Discovery’s combination with WarnerMedia. Zaslav resisted the move, believing that CNN strengthened the cable portfolio and gave it more leverage during negotiations with distributors.
“The dynamics of the industry increasingly necessitate a further winnowing of the field,” MoffettNathanson media analyst Robert Fishman wrote in a Thursday note. “The question is not whether more pieces will be moved around or knocked off the board or if further consolidation will happen — it is a matter of who is the buyer and who is the seller.”
The MoffettNathanson report also pointed out that while “this reorganization will make any potential deal that much easier to pull off,” it does not change the makeup of the company, which “will still rely on linear network cash flows to fund de-levering and continued [streaming] investment.”
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