What’s Warner Bros. Discovery’s next move? David Zaslav and John Malone offer clues

Warner
Bros.
Discovery‘s
next
step
to
gain
scale
may
be
looking
at
distressed
assets.

Chief
Executive
David
Zaslav
and
board
member
John
Malone
both
made
comments
this
week
suggesting
the
company
is
paying
down
debt
and
building
up
free
cash
flow
to
set
up
acquisitions
in
the
next
two
years
of
media
businesses
suffering
from
diminished
valuations.

The
targets
could
be
companies
flirting
with
or
filing
for
bankruptcy,
Malone
said
in
an
exclusive
interview
with
CNBC
on
Thursday.
While
U.S.
regulators
may
frown
at
large
media
companies
coming
together
because
of
overlaps
with
studio,
cable
or
broadcasting
assets,
they’ll
be
much
more
forgiving
if
the
companies
are
struggling
to
survive,
Malone
told
David
Faber.

“I
think
we’re
going
to
see
very
serious
distress
in
our
industry,”
Malone
said.
“There
is
an
exemption
to
the
antitrust
laws
on
a
failing
business.
At
some
point
of
distress,
right,
then
some
of
the
restrictions,
they
look
the
other
way.”

Media
company
valuations
have
been
plummeting
amid
streaming
video
losses,
traditional
TV
subscriber
defections,
and
a
down
advertising
market.
This
has
affected
Warner
Bros.
Discovery
as
much
as
its
peers.
The
company’s
market
valuation
recently
fell
below
$23
billion,
its
lowest
point
since
WarnerMedia
and
Discovery

merged
last
year.
The
company
ended
the
third
quarter
with
about
$43
billion
in
net
debt.

Warner
Bros.
Discovery
is
trying
to
position
itself
to
be
an
acquirer,
rather
than
a
distressed
asset,
itself,
by
paying
down
debt
and
increasing
cash
flow,
Zaslav
said
during
his

company’s
earnings
conference
call
this
week.
Warner
Bros.
Discovery
has
paid
down
$12
billion
and
expects
to
generate
at
least
$5
billion
in
free
cash
flow
this
year,
the
company
said.

“We’re
surrounded
by
a
lot
of
companies
that
are
–
don’t
have
the
geographic
diversity
that
we
have,
aren’t
generating
real
free
cash
flow,
have
debt
that
are
presenting
issues,”
Zaslav

said
Thursday.
“We’re
de-levering
at
a
time
when
our
peers
are
levering
up,
at
a
time
when
our
peers
are
unstable,
and
there
is
a
lot
of
excess
competitive
–
excess
players
in
the
market.
So,
this
will
give
us
a
chance
not
only
to
fight
to
grow
in
the
next
year,
but
to
have
the
kind
of
balance
sheet
and
the
kind
of
stability
…
that
we
could
be
really
opportunistic
over
the
next
12
to
24
months.”

Still,
Warner
Bros.
Discovery
also
acknowledged
it
will
miss
its
own
year-end
leverage
target
of
2.5
to
3
times
adjusted
earnings
as
the
TV
ad
market
struggles
and
linear
TV
subscription
revenue
declines.

Malone
has
some
experience
with
profiting
from
times
of
distress.

His

Liberty
Media
acquired
a
40%
stake
in


Sirius
XM
over
several
years
more
than
a
decade
ago,
saving

it
from
bankruptcy.
Since
then,
the
equity
value
of
the
satellite
radio
company
has
bounced
back
from
nearly
zero
to
about
$5
per
share.
Sirius
XM
currently
has
a
market
capitalization
of
about
$18
billion.

“It
made
us
a
lot
of
money
with
Sirius,”
Malone
told
Faber.

While
Malone
didn’t
name
a
specific
company
as
a
target
for
Warner
Bros.
Discovery,
he
discussed


Paramount
Global
as
an
example
of
a
company
whose
prospects
seem
shaky.
Paramount
Global’s
market
valuation
has
slumped
below
$8
billion
while
carrying

about
$16
billion
in
debt.

Malone
noted
that
Paramount’s
debt
was

recently
downgraded.
“I
think
that
they’re
running
probably
negative
free
cash
flow,”
he
said.

While
Paramount
Global
shares
have
fallen
precipitously
since
Viacom
and
CBS
merged
in
2019,
there
are
signs
the
company
is
shoring
up
its
balance
sheet.
CEO
Bob
Bakish
said
earlier
this
month
Paramount
Global’s
streaming
losses
will
be
lower
in
2023
than
2022,
and
the
company
expects
further
improvement
to
losses
in
2024.
The
company
closed
a
sale
for

book
publisher
Simon
&
Schuster
for
$1.6
billion
and
will
use
the
proceeds
to
pay
down
debt.

Paramount
Global
is
one
of
the
few
assets
that
logically
fits
Malone’s
vision
of
a
media
asset
that
would
have
regulatory
issues
as
an
acquisition
with
potential
distress
concerns.


Comcast‘s
NBCUniversal,
another
potential
merger
partner,
will
lose
more
than
$2
billion
this
year
on
its
streaming
service,
Peacock,
but
the
media
giant
is
shielded
by
its
parent
company,
the
largest
U.S.
broadband
provider.

“Warner
Bros.
[Discovery]
now
is
making
money.
Not
a
lot,
but
they’re
making
money,”
Malone
said.
“Peacock
is
losing
a
lot
of
money.
Paramount
is
losing
a
ton
of
money
that
they
can’t
afford.
At
least
[Comcast
CEO]
Brian
[Roberts]
can
afford
to
lose
the
money.”

Paramount
Global’s
controlling
shareholder
Shari
Redstone
is
open
to
a
transformative
transaction,
CNBC

reported
last
month.
Puck’s
Dylan
Byers

recently
reported
that
industry
insiders
have
speculated
Warner
Bros.
Discovery
might
pursue
an
acquisition
of
Paramount
Global
after
the
2024
U.S.
presidential
election.

A
combination
of
NBCUniversal
and
Paramount
Global
also
has
strategic
logic,
but
the
combination
of
two
national
broadcast
networks
—
Comcast’s
NBC
and
Paramount
Global’s
CBS
—
would
present
a
significant
regulatory
hurdle.
Warner
Bros.
Discovery
doesn’t
own
a
broadcast
network,
making
an
acquisition
of
CBS
easier.

Spokespeople
for
Paramount
Global
and
Warner
Bros.
Discovery
declined
to
comment.

While
Malone
said
all
legacy
media
companies
should
be
talking
to
each
other
about
merger
synergies,
he
acknowledged
valuations
may
have
to
fall
farther
to
get
regulators
on
board
with
further
consolidation.
Malone
predicted
that
could
happen
in
the
same
timeline
Zaslav
gave
—
within
the
next
two
years.

“Eventually
maybe
there’ll
be
regulatory
relief,”
Malone
said.
“Out
of
distress
usually
comes
the
reduction
in
competition,
increased
pricing
power,
and
the
opportunity
to
buy
assets
at
a
deep
discount.”

Disclosure:
Comcast
owns
NBCUniversal,
the
parent
company
of
CNBC.

Tune
in:
CNBC’s
full
interview
with
John
Malone
will
air
8
p.m.
ET
Thursday.