A few months after Warner Bros. Discovery's second anniversary, a leading media analyst has a verdict for the entertainment titan — and it's not one CEO David Zaslav wants to hear.
Zaslav, the cable-executive-turned-mogul, orchestrated the tie-up between Warner Media and Discovery after running the latter for 15 years. His quest to build a Hollywood titan hasn't gone as planned, as WBD shares have shed two-thirds of their value since debuting in April 2022.
WBD investors may be running low on patience and faith in Zaslav, as is Jessica Reif Ehrlich, the analyst who leads Bank of America's media team. She said the media conglomerate needs a major facelift, and quickly — especially in light of a new round of layoffs.
"The current composition as a consolidated public company is not working," Ehrlich wrote in a July 16 note. She went on to say: "Staying the course appears to be untenable given the persistent secular headwinds within the linear ecosystem, coupled with the overwhelming debt load and lackluster share performance."
Zaslav should reexamine his strategy and look at options that would benefit his long-suffering stock, Ehrlich wrote.
Wall Street believes Ehrlich is onto something. WBD shares are up double-digits in the days after the report was released, which is a much-needed relief rally from what was a 35% year-to-date loss.
3 best blueprints for a WBD turnaround
In the note, BofA media analysts outlined several potential paths forward for Zaslav and the company.
One palatable plan would be to buy a broadcast network, which WBD lacks but its major competitors have. These venerable platforms offer reach that translates to higher advertising dollars, BofA noted.
"This would likely come with premium sports rights (e.g., NFL), which would help to protect their linear business and increasingly help the company transition and grow streaming (as sports are increasingly dual cast)," Ehrlich wrote.
Of the four major US broadcast networks, only NBC appears to be utterly untouchable. Disney CEO Bob Iger floated the idea of selling ABC last year, and CBS' future could be in flux ahead of Paramount Global's merger with Skydance. Ehrlich also cited Fox as a possibility but said it's unclear whether its parent company would sell it.
However, a broadcast network would add even more debt to WBD's burden while compounding concerns about its exposure to the fading pay-TV business.
Perhaps the most compelling option for WBD is setting up a streaming joint venture or merger for Max, its flagship streamer. The service already has a solid content slate, Ehrlich noted, and pairing it with a long-term partner would lower costs and boost profitability. Max's forthcoming bundle with Disney+ and Hulu may help, but it's not nearly as comprehensive as a joint venture would be.
"We have long discussed an impending 'rebundling' in media, as the current streaming market is oversaturated and ripe for consolidation," Ehrlich wrote. "A merger or JV involving Max should have the effect of lowering churn and marketing costs while raising customer lifetime value."
Though a streaming deal would be a net positive, it may not be enough to keep WBD afloat.
Another possibility BofA outlined is a strategic spinoff of its streaming and studio businesses, which would unshackle them from WBD's roughly $40 billion load of investment-grade debt. This would leave WBD stranded with shrinking legacy TV assets, though the move could double its equity value.
"This scenario would be a significant transfer in value from debt holders to equity holders," Ehrlich wrote, though she added that "the optics of this are clearly not ideal, and the risks are significant."
Whatever Zaslav decides, he should act soon to prevent a shareholder revolt, especially considering the activist investor battle his Disney counterpart, Iger, had to deal with earlier this year. After angering much of Hollywood during last year's strikes, Zaslav needs as many allies as possible.
