Deal Overview
On December 12, 2024, Warner Bros. Discovery Inc. (NASDAQ: WBD, $10.63, Market capitalization: $26.1 billion), a global media and entertainment company, announced that its Board of Directors authorized the Company to implement a new corporate structure designed to enhance its strategic flexibility and create potential opportunities to unlock additional shareholder value (for more information, visit spinoffresearch.com). The market reaction to the news was positive, as the stock jumped ~15.4% on 12/12. Under the new corporate structure, Warner Bros. Discovery will serve as the parent company for two distinct operating divisions: i) Streaming & Studios and ii) Global Linear Networks. The Company is expected to start the foundational steps immediately and to complete the implementation of the new corporate structure by mid-2025. J.P. Morgan, Evercore, and Guggenheim Securities are serving as financial advisors to Warner Bros. Discovery and Kirkland & Ellis and Wachtell Lipton are serving as legal counsel.
Global Linear Networks (Spin-Off) will be a premier linear television business that operates renowned networks with compelling news, sports, scripted and unscripted programming. It will include CNN, TNT, TBS, Eurosport, HGTV, Food Network, the Turner Networks, Magnolia, TLC, and Animal Planet, etc. Global Linear Networks will focus on maximizing profitability and free cash flow to continue deleveraging. On the other hand, the Streaming & Studios division (RemainCo) will consist of the Company’s Studios and DTC segments, which include Warner Bros. Motion Picture Group, Warner Bros. Television Group, Warner Bros. Pictures Animation, Warner Bros. Games, New Line Cinema, HBO, HBO Max, and discovery+. Post Spin-Off, it will be a globally scaled streaming platform and storied film and entertainment studios with a portfolio of popular and valuable intellectual property, which will focus on driving growth and strong returns on increased invested capital.
Deal Rationale
In April 2022, WarnerMedia was spun out from AT&T and merged with Discovery Inc. to become a leading global media and entertainment company with one of the largest content portfolios. However, the Company was saddled with a huge debt of ~$53 billion (now deleveraged to ~$40.3 billion in gross debt in 3Q24). Despite the cost-cutting measures, the existential crisis of cord-cutting in the cable TV industry impacted Warner Bros. Discovery’s share performance. Recently, media companies are considering options for fading cable TV businesses, once cash-generating machines where revenues are declining owing to a shift in consumer demand to streaming services. Adapting to the shifting viewer preferences, Warner Bros. Discovery’s corporate structure restructuring announcement follows industry speculation about separating the declining linear networks business from the relatively healthy Studio business and the growing Streaming business.
It’s worth noting that the corporate structure restructuring is in line with the industry trend, where companies are spinning off cable/linear network assets, viz. Comcast is spinning off its cable networks business. Although the Company continues to realize substantial synergies from keeping Streaming & Studio assets and Linear Networks together, it sees an opportunity to potentially unlock significant shareholder value under a scenario where investors can value Streaming & Studio assets and Linear Networks separately. The separation will allow the two core businesses to pursue strategic and financial paths and unlock greater value by operating as pureplay entities. Moreover, the objective of such a move could be to eliminate the financial drag of linear networks, which are losing subscribers and advertising revenue at a steady pace. For instance, WBD wrote down ~$9 billion on the value of its cable networks in August 2024 due to uncertainty around fees from cable and satellite distributors and sports rights renewals.
CEO David Zaslav, a veteran deal-maker, noted that he anticipates Presidentelect Donald Trump’s administration would be friendlier to deal-making, opening the door to media industry consolidation during the 3Q24 earnings call. Furthermore, as per the latest regulatory filing, Zaslav had engaged in merger discussions with Paramount Global in December 2023, though a deal never materialized. Hence, Warner Bros. Discovery’s decision to separate its businesses reflects a proactive approach to navigating the evolving media industry. By creating more focused and agile divisions, the Company aims to enhance its competitiveness and drive long-term growth. It should be noted that Global Linear Networks (Spin-Off) can be seen as a potential deal partner for Comcast’s SpinCo (cable network assets). Moreover, the Streaming & Studios division (RemainCo) will be a globally scaled streaming platform and storied film and entertainment studios with a portfolio of popular and valuable intellectual property, making it an attractive takeover target.
Business Update
Warner Bros. Discovery and Comcast announce multi-year distribution agreements across Xfinity and Sky UK
On 12/9, Warner Bros. Discovery Inc. and Comcast announced long-term agreements that will deliver WBD’s extensive portfolio of content to Xfinity and Sky UK and Ireland customers using Comcast’s global technology platform across linear television, apps, and streaming services. Comcast has entered into renewal agreements that further the companies’ longstanding distribution relationship with WBD’s portfolio of linear cable networks for Xfinity TV customers, including TNT, TBS, CNN, Discovery, Food Network, HGTV, TLC, and Investigation Discovery. In addition, the agreements provide continued carriage of HBO and expand Comcast’s rights to package the ad-supported versions of Max and Discovery+ in its streaming bundles. Comcast will also continue to offer WBD content as part of its U.S. NOW TV streaming services. However, the financial terms of the agreements were not disclosed.
Company Description
Warner Bros. Discovery Inc. (Parent)
Headquartered in New York, Warner Bros. Discovery, Inc. is a global media and entertainment company. The Company currently operates through three segments: Studios, Networks, and DTC. The Studios segment consists of the production and release of feature films for initial exhibition in theaters, production and initial licensing of television programs to its networks/DTC services as well as third parties, and themed experience licensing, and interactive gaming. The Networks segment primarily consists of its domestic and international television networks, viz. TNT, TBS, CNN, Discovery, Food Network, HGTV, TLC, and Eurosport, etc. The DTC segment primarily consists of its premium pay-TV and streaming services such as HBO, HBO Max, and Discovery+, etc. In FY23, the Company recorded revenues of $41.3 billion. Under the new corporate structure, Warner Bros. Discovery will serve as the parent company for two distinct operating divisions: i) Streaming & Studios and ii) Global Linear Networks. Post Spin-Off, Streaming & Studios division will primarily consist of the Company’s Studios and DTC segments, which include Warner Bros. Motion Picture Group, Warner Bros. Television Group, Warner Bros. Pictures Animation, Warner Bros. Games, New Line Cinema, HBO, HBO Max, and discovery+. It will be a globally scaled streaming platform and storied film and entertainment studio with a portfolio of popular and valuable intellectual property.
Global Linear Networks (Spin-Off)
Global Linear Networks will be a premier linear television business that operates some of the most renowned networks with compelling news, sports, scripted and unscripted programming. It will include CNN, TNT, TBS, Euro sport, HGTV, Food Network, the Turner Networks, Magnolia, TLC, and Animal Planet, etc. In FY23, the Networks segment recorded revenues of $21.2 billion.