David Zaslav, CEO and Chairman of Warner Bros. Discovery (left), and John Malone, president of Liberty Media, Liberty Global and Qurate Retail Group.
CNBC | Reuters
Discovery of Warner Bros.The next step to gain scale could be to look at distressed assets.
Chief Executive David Zaslav and board member John Malone both made comments this week suggesting the company was paying down debt and building free cash flow to make acquisitions over the next two years. media companies suffering from diminished valuations.
The targets could be companies flirting with or filing for bankruptcy, Malone said in an exclusive interview with CNBC on Thursday. Although U.S. regulators may frown on the consolidation of large media companies because of overlaps with studio, cable or broadcast assets, they will be much more lenient if the companies struggle to survive, Malone told David Faber.
“I think we’re going to see some very serious distress in our industry,” Malone said. “There is an exemption from antitrust laws for bankrupt companies. At one point in trouble, then when there are certain restrictions, they look the other way.”
Media company valuations have fallen due to streaming video losses, subscriber defections from traditional television and a shrinking advertising market. This affected Warner Bros. Discovery as much as its peers. The company’s market valuation recently fell below $23 billion, its lowest level since WarnerMedia and Discovery. merged last year. The company ended the third quarter with net debt of approximately $43 billion.
Warner Bros. Discovery is trying to position itself as an acquirer, rather than a distressed asset, by paying down debt and increasing cash flow, Zaslav said during his speech. company results conference call this week. Warner Bros. Discovery has repaid $12 billion and expects to generate at least $5 billion in free cash flow this year, the company said.
“We’re surrounded by a lot of companies that don’t have the same geographic diversity as us, that don’t generate real free cash flow, and that have problematic debts,” Zaslav said. said Thursday. “We are deleveraging at a time when our peers are taking on more debt, at a time when our peers are unstable, and there is a lot of excess competitiveness, excess players in the market. So this will give us a chance to not only strive to grow next year, but also to have the kind of balance sheet and the kind of stability… that would allow us to be really opportunistic over the next 12 to 24 months.”
However, Warner Bros. Discovery also acknowledged that it would fail to meet its own year-end leverage target of 2.5 to 3 times adjusted earnings, as the TV advertising market struggles and subscription revenue Linear TVs are decreasing.
Malone has a habit of taking advantage of times of distress.
Her Media Freedom acquired a 40% stake in SiriusXM over several years more than ten years ago, saving it’s bankruptcy. Since then, the satellite radio company’s stock value has rebounded from near zero to around $5 per share. Sirius XM currently has a market capitalization of approximately $18 billion.
“It made us a lot of money with Sirius,” Malone told Faber.
Although Malone did not name a specific company as a target for Warner Bros. Discovery, he discussed Paramount Worldwide as an example of a company whose prospects appear fragile. Paramount Global’s market valuation has fallen below $8 billion about $16 billion in debt.
Malone pointed out that Paramount’s debt was recently decommissioned. “I think they probably have negative free cash flow,” he said.
While Paramount Global shares have fallen precipitously since Viacom and CBS merged in 2019, there are signs that the company is strengthening its balance sheet. CEO Bob Bakish said earlier this month that Paramount Global’s streaming losses would be lower in 2023 than in 2022, and that the company expects losses to further improve in 2024. The company entered into a sale for book publisher Simon & Schuster for $1.6 billion and will use the proceeds to pay down debt.
Shari Redstone, president of Paramount Global, attends the Allen & Co. Media and Technology Conference in Sun Valley, Idaho, Tuesday, July 11, 2023.
David A. Grogan | CNBC
Paramount Global is one of the few assets that logically fits Malone’s vision of a media asset that would have regulatory issues as an acquisition with potential distress issues. ComcastNBCUniversal, another potential merger partner, will lose more than $2 billion this year on its Peacock streaming service, but the media giant is protected by its parent company, the largest U.S. broadband provider.
“Warner Bros. (Discovery) is making money now. Not a lot, but they’re making money,” Malone said. “Peacock is losing a lot of money. Paramount is losing a ton of money that they can’t afford. At least (Comcast CEO) Brian (Roberts) can afford to lose money.”
Paramount Global Majority Shareholder Shari Redstone Open to Transformative Deal, CNBC reported last month. Dylan Byers of Puck recently reported as industry insiders speculated that Warner Bros. Discovery may pursue acquisition of Paramount Global after the 2024 US presidential election.
A combination of NBCUniversal and Paramount Global also makes strategic sense, but combining two national broadcast networks — Comcast’s NBC and Paramount Global’s CBS — would present a significant regulatory hurdle. Warner Bros. Discovery does not own a broadcast network, making the acquisition of CBS easier.
Spokespeople for Paramount Global and Warner Bros. Discovery declined to comment.
Although Malone said all traditional media companies should discuss merger synergies with each other, he acknowledged that valuations may have to fall further to get buy-in from regulators for further consolidation. Malone predicted that this could happen in the same time frame as Zaslav indicated – within the next two years.
“Eventually there may be some regulatory relief,” Malone said. “Distress typically leads to reduced competition, increased pricing power, and the ability 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 airs Thursday at 8 p.m. ET.