For your consideration: Warner-Discovery part two

NEW YORK, Nov 3 (Reuters Breakingviews) - David Zaslav is finding that big may not be big enough. The Warner Bros Discovery (WBD.O) boss has encountered a series of problems since his splashy merger in April. Another deal with a similarly undersized peer might produce a rare sequel that improves on the original.

Since the combination of the companies behind “House of the Dragon” and Shark Week, it has lost nearly half its market value, to around $29 billion. The decline is twice as bad as ones suffered by Walt Disney (DIS.N) and Netflix (NFLX.O). Zaslav is feverishly trying to make good on the transaction by knitting together CNN, the Warner Bros studio, HGTV and Animal Planet while carving out some $3 billion of expenses.

There is no shortage of distractions. A giant pile of borrowed money used to help cover the cash outlay to AT&T (T.N) for Warner Media looms large. Warner Bros Discovery’s $49 billion of net debt equates to a whopping 5 times this year’s adjusted EBITDA. Zaslav last month effectively conceded the deal was mispriced with a $2.5 billion impairment charge on Batgirl, Elmo and other content. In August, he also dialed down next year’s adjusted EBITDA forecast to $12 billion from $14 billion.

In that context, it might seem Looney Tunes to consider yet more M&A. The proliferation of video-streaming choices, however, means more consolidation makes some sense. Warner Bros Discovery counts more than 90 million subscribers for services such as HBO Max, less than half as many as at Disney and Netflix. Paramount Global (PARA.O) and Comcast’s NBC Universal have even fewer paying customers.

What if Zaslav teamed up with Paramount? The combined EBITDA next year would be an estimated $15 billion, per Refinitiv data. There might be another $3 billion in savings, using the same 20% of EBITDA targeted by Warner Media and Discovery. Together, the net debt would swell to $61 billion but drop to approximately 3.5 times EBITDA.

Merging with NBCU theoretically offers even greater benefits: about $21 billion in combined EBITDA including synergies. If parent Comcast attached $19 billion of debt, the same amount media mogul Rupert Murdoch stuffed into his Fox (FOXA.O) sale to Disney, the new Warner Bros Discovery NBCU would have a lower debt ratio of about 3 times EBITDA to accompany its enhanced clout.

There is no reason to think such a deal will transpire right away. As with any movie script, it warrants exhaustive deliberation. But Hollywood has a rich history of repeating old storylines.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

Warner Bros Discovery said on Oct. 24 that it would take an impairment charge of up to $2.5 billion on strategic content, a significant portion of the total $3.2 billion to $4.3 billion in charges related to its financial restructuring. The company scrapped the movie “Batgirl” and “The Not-Too-Late Show with Elmo.”

Warner Bros Discovery is scheduled to report third-quarter earnings after U.S. stock markets close on Nov. 3. Its shares have fallen about 48%, to nearly $12 apiece, since the merger of Discovery with AT&T’s Warner Media on April 8.

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