Warner Discovery splits cable from marquee streaming, studio businesses

Warner Bros. Discovery Splits into Two: A Bold Move in a Shifting Media Landscape

In a dramatic restructuring, Warner Bros. Discovery is separating into two independent, publicly traded companies. This move effectively unravels much of the 2022 merger between Warner Media and Discovery Communications, marking a significant shift in the entertainment industry.

The split will create:

• Global Networks: Home to CNN, TNT, TBS, a vast portfolio of cable channels, international holdings, and Discovery+. This entity will also house CNN's upcoming streaming service and U.S. sports properties like Bleacher Report. A significant portion of Warner's ~$34 billion debt will reside here.
• Streaming & Studios: Housing HBO Max, the movie studio, and TV production business. Global Networks will retain a stake of up to 20% in this company, with the revenue from this stake earmarked for debt reduction.

This strategic decision reflects the broader challenges facing traditional media companies. Declining ratings and revenue in cable networks, as viewers migrate to streaming platforms like Netflix and Amazon Prime Video, have prompted this decisive action. Comcast's similar move to spin off its cable network business into Versant further underscores this industry trend.

Leadership Changes:

• David Zaslav will remain CEO of Streaming & Studios.
• Gunnar Wiedenfels will become CEO of Global Networks.

Financial Implications:

• The company secured a $17.5 billion bridge loan from J.P. Morgan to repurchase a portion of its debt. Post-separation, both new entities will issue new debt to repay this loan.
• Despite a 6% revenue drop in cable networks during the quarter ending March 31st, they remain Warner's largest revenue generator. Global Networks, boasting stronger cash flow, will carry a substantial portion of the debt.
• The restructuring aims to unlock shareholder value and provide both companies with increased agility in the competitive media market.

Challenges and Context:

• Shareholder Rebuke: Over 59% of shareholders recently voted against Zaslav's $51.9 million compensation package.
• Credit Downgrade: S&P Global Ratings downgraded Warner's debt to junk status, largely due to cable network challenges.
• Tumultuous Merger: The Warner-Discovery merger has been marked by significant employee layoffs (thousands over three years) and ongoing cost-cutting measures.
• Stock Performance: The company's stock price has plummeted approximately 59% since the merger.

Looking Ahead: Both companies plan to leverage their respective strengths and explore potential acquisitions. This bold restructuring represents a gamble on the future of media, betting that the sum of the parts will be greater than the whole.

Contact: Joe Flint at Joe.Flint@wsj.com