David Zaslav, CEO and president of Warner Bros. Discovery (L), and John Malone, chairman of Liberty Media, Liberty Global, and Qurate Retail Group.
CNBC | Reuters
Warner Bros. Discovery‘s next step to achieve scale could also be taking a look at distressed assets.
Chief Executive David Zaslav and board member John Malone each made comments this week suggesting the corporate is paying down debt and increase free money flow to establish acquisitions within the next two years of media businesses affected by diminished valuations.
The targets could possibly be corporations 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 corporations coming together due to overlaps with studio, cable or broadcasting assets, they’ll be way more forgiving if the businesses are struggling to survive, Malone told David Faber.
“I feel we’ll see very serious distress in our industry,” Malone said. “There’s an exemption to the antitrust laws on a failing business. In the course of distress, right, then among the restrictions, they appear the opposite way.”
Media company valuations have been plummeting amid streaming video losses, traditional TV subscriber defections, and a down promoting market. This has affected Warner Bros. Discovery as much as its peers. The corporate’s market valuation recently fell below $23 billion, its lowest point since WarnerMedia and Discovery merged last 12 months. The corporate ended the third quarter with about $43 billion in net debt.
Warner Bros. Discovery is attempting to position itself to be an acquirer, fairly than a distressed asset, itself, by paying down debt and increasing money 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 the least $5 billion in free money flow this 12 months, the corporate said.
![Streaming isn't working for most players that are trying it, says Liberty Media's John Malone](https://image.cnbcfm.com/api/v1/image/107331569-16995459611699545958-31952761836-1080pnbcnews.jpg?v=1699545960&w=750&h=422&vtcrop=y)
“We’re surrounded by a whole lot of corporations which might be – do not have the geographic diversity that we now have, aren’t generating real free money flow, have debt which might be 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’s a whole lot of excess competitive – excess players available in the market. So, this may give us a probability not only to fight to grow within the next 12 months, but to have the form of balance sheet and the form of stability … that we could possibly be really opportunistic over the next 12 to 24 months.”
Still, Warner Bros. Discovery also acknowledged it’s going to miss its own year-end leverage goal of two.5 to three times adjusted earnings because the TV ad market struggles and linear TV subscription revenue declines.
Buying from distress
Malone has some experience with taking advantage of times of distress.
His Liberty Media acquired a 40% stake in Sirius XM over several years greater 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 whole lot of money with Sirius,” Malone told Faber.
While Malone didn’t name a selected company as a goal for Warner Bros. Discovery, he discussed Paramount Global for example of an organization 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 feel that they are running probably negative free money flow,” he said.
Paramount Global’s third-quarter money flow was $377 million, and the corporate has forecast a return to positive free money flow in 2024.
While Paramount Global shares have fallen precipitously since Viacom and CBS merged in 2019, there are signs the corporate is shoring up its balance sheet. CEO Bob Bakish said earlier this month Paramount Global’s streaming losses will likely be lower in 2023 than 2022, and the corporate expects further improvement to losses in 2024. The corporate closed a sale for book publisher Simon & Schuster for $1.6 billion and can use the proceeds to pay down debt.
Paramount Global’s fate
Shari Redstone, chair of Paramount Global, attends the Allen & Co. Media and Technology Conference in Sun Valley, Idaho, on Tuesday, July 11, 2023.
David A. Grogan | CNBC
Paramount Global is considered one of the few assets that logically suits Malone’s vision of a media asset that will have regulatory issues as an acquisition with potential distress concerns. Comcast‘s NBCUniversal, one other potential merger partner, will lose greater than $2 billion this 12 months on its streaming service, Peacock, however the media giant is shielded by its parent company, the biggest U.S. broadband provider.
“Warner Bros. [Discovery] now could be creating wealth. Not rather a lot, but they’re creating wealth,” Malone said. “Peacock is losing a whole lot of money. Paramount is losing a ton of cash that they cannot afford. At the very least [Comcast CEO] Brian [Roberts] can afford to lose the cash.”
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 mix of NBCUniversal and Paramount Global also has strategic logic, but the mix of two national broadcast networks — Comcast’s NBC and Paramount Global’s CBS — would present a major 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 corporations ought to be talking to one another about merger synergies, he acknowledged valuations could have to fall farther to get regulators on board with further consolidation. Malone predicted that might occur in the identical timeline Zaslav gave — inside the next two years.
“Eventually perhaps there will be regulatory relief,” Malone said. “Out of distress often comes the reduction in competition, increased pricing power, and the chance to purchase 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.
![Liberty Media's John Malone on interest rates, media outlook and the streaming landscape](https://image.cnbcfm.com/api/v1/image/107331575-16995460601699546055-31952775020-1080pnbcnews.jpg?v=1699546059&w=750&h=422&vtcrop=y)