🎦Has Warner Brothers Discovery Lied to Investors?

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Warner Brothers Discovery: False Brotherhood?

Warner Brothers Discovery (WBD) has a new slogan – “The stuff that dreams are made of.” However, the current turn of events is proving to be a nightmare for their shareholders. Shares have already halved since the combined entity began trading, and now a local police pension board has sued the company. Will they manage to come clean?

More But Fewer Subscribers

AT&T acquired Time Warner in 2018 for a whopping $85B. The prior parent of HBO, CNN, and Warner Brothers could not prosper under the micromanagement of the telecom giant. AT&T also ended up with a mountain of debt post the deal.

Realizing they could not run a media business, AT&T decided to beat a hasty exit from the company just three years after acquiring it. Therefore, it agreed to spin off WarnerMedia for $43B in April this year, marking the end of a disastrous acquisition.

The deal with Discovery closed in May with the combined entity now named Warner Brothers Discovery. Shares of the combined company began trading at ~$25 apiece.

Discovery shareholders accepted shares of the new company for pre-merger Class C common shares. The company issued over 700M shares to common and preferred shareholders of Discovery. Among them is an Illinois police pension fund, which has now sued the company, alleging that it deceived investors by misrepresenting subscriber numbers of HBO Max during the merger.

The lawsuit alleges that WBD overstated HBO Max subscribers by as many as 10M as they also included AT&T customers who received bundled access to HBO Max but did not sign up as subscribers! It also accuses CEO David Zaslav and CFO Gunnar Wiedenfels of violating their obligation to alert shareholders before a vote on approving the merger took place in March.

What strengthens their case further is that WBD acknowledged to investors after the merger completion that HBO Max had a “high churn rate,” making the business unviable unless the rates reversed. “Churn Rate” means the number of customers who sign up and leave a service during the subscription period. Due to the increased competitive intensity, the streaming industry is grappling with high churn rates.

WBD reported a $3.42B loss in August, mainly due to merger charges. The company acknowledged that it adjusted its definition of a “subscriber” and removed the 10M AT&T mobility subscribers from the overall count.

One Problem After Another

Subscriber losses and high production costs have hurt streaming giants who are embarking on a cost-cutting spree. Netflix has already laid off hundreds of staffers, while WBD has also let go of a similar quantum to meet its $3B cost savings target. It has also canceled several high-profile projects like CNN+ and the $90M Batgirl film to save costs.

Prior to the merger, the management guided for $52B in revenue and $14B in Ebitda for 2023. However, in its inaugural earnings call as a merged entity, the management slashed its outlook for operating profits for this year and the next, citing a less favorable macroeconomic backdrop, a change in industry dynamics, and higher production costs.

The merger resulted in a $55B debt on WBD’s balance sheet leading to the company prioritizing deleveraging over growing the business. Rising interest rates which risk their near-term cash flow margins are additional worries.

However, the company is making efforts to reduce debt. It has repaid $6B since the deal’s completion and has no remaining repayment obligations until it has to repay $1.3B in 2023 and $4.3B in 2024. Analysts believe that even with a revised Ebitda guidance of $12B in 2023, the company will have enough cash to repay its near-term debt and invest in growth.

HBO Max has 53M subscribers in the US, barely a quarter of Netflix and Disney+, and less than half of US households. It aims to launch services in international territories and increase the number of territories it is in to 190 by 2026 from the current 61. Analysts are hopeful of higher subscriber growth in the future, leading to better revenues and profits.

Inflating subscribers, an impending court case, a stretched balance sheet, and rumors – the company cannot catch a break. Speaking of rumors, reports are suggesting a possible merger between WBD and NBC Universal. However, CEO Zaslav shot down the news, telling employees at a company townhall that they are “not for sale” and have everything to succeed.

Shares of Warner Brothers Discovery have more than halved from when they began trading four months ago. With multiple headwinds facing them, the last thing they wanted was for their credibility to be on the line. For shareholders, this is definitely not the stuff that dreams are made of! They could only hope this ordeal ends soon, with or without an HBO Max subscription!

Market Reaction
WBD ended at $11.66, down -1.10%.

Company Snapshot 📈

WBD $11.66, -0.13 (-1.10%).

Analyst Ratings (26 Analysts) BUY 54%  HOLD 42%  SELL 04%

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Today’s Fun Fact

Laugh tracks used in television were mostly recorded during the 50s.

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