This analysis is provided by Eden Bradfeld at BlackBull Research.
I’ve written a lot about WarnerBrothersDiscovery, and I’ve talked about it a lot in this newsletter.
Long story short — giant monolith formed by the merger of Discovery and the spun-out Warner assets of AT&T³.
The big issue was debt. They’ve managed to pay off a lot of debt — the company’s leverage ratio of 3.8x adjusted EBITDA is on its way to a ratio of 2.5x-3x gross leverage. They’ve paid a stunning 19 billion dollars of debt down in three years.
This led to their CEO, Zaz, being probably the most hated man in the industry. But that leads to strong cash flow — I’ve said before WBD is like a debt product with an equity stub; now it is slowly becoming a pure equity play, with cashflow up the wazoo — the point to remember here is that Max, the company’s streaming service, is growing well — Max added 4.5mn subscribers, versus analysts expecting 2.5mn. That’s proof in the power of their content — their IP — and it is an indication that the company’s content can compete with Netflix.
Stock is up 49% in 6 months, and trades around 11 bucks. If Zaz can continue to reduce debt, the stockholders should be very happy.
I’ve written a lot about WarnerBrothersDiscovery, and I’ve talked about it a lot in this newsletter.
Long story short — giant monolith formed by the merger of Discovery and the spun-out Warner assets of AT&T³.
The big issue was debt. They’ve managed to pay off a lot of debt — the company’s leverage ratio of 3.8x adjusted EBITDA is on its way to a ratio of 2.5x-3x gross leverage. They’ve paid a stunning 19 billion dollars of debt down in three years.
This led to their CEO, Zaz, being probably the most hated man in the industry. But that leads to strong cash flow — I’ve said before WBD is like a debt product with an equity stub; now it is slowly becoming a pure equity play, with cashflow up the wazoo — the point to remember here is that Max, the company’s streaming service, is growing well — Max added 4.5mn subscribers, versus analysts expecting 2.5mn. That’s proof in the power of their content — their IP — and it is an indication that the company’s content can compete with Netflix.
Stock is up 49% in 6 months, and trades around 11 bucks. If Zaz can continue to reduce debt, the stockholders should be very happy.
Trade active
Which brings me to the streamers. Netflix has had a mega-run in the stock market (Bill Ackman at Pershing Square did poorly there — he took a 400 million dollar loss on the stock). The others have had less of a good time (I’m not going to talk about Amazon/Prime, because it’s such a tiny fraction of Amazon’s business it doesn’t bear mentioning). Disney stock is down about -10% YTD, while WarnerBrothersDiscovery is down -2%. I’m unsure if it’s worth talking about Paramount — at this point the sale of Shari’s baby seems so nebulous, so drawn out, that even the most ardent chroniclers of it — like the team at Puck — are sort of running out of energy³.So what we’re really talking about is Disney (DIS) and WarnerBrothersDiscovery (WBD), and the one I’m most interested in is WBD. Here’s what I wrote a couple weeks ago:
Long story short — giant monolith formed by the merger of Discovery and the spun-out Warner assets of AT&T2. The big issue was debt. They’ve managed to pay off a lot of debt — the company’s leverage ratio of 3.8x adjusted EBITDA is on its way to a ratio of 2.5x-3x gross leverage. They’ve paid a stunning $19 billion dollars of debt down in three years
You have to think of WBD as quite a feat of financial engineering — it has been operating as a debt entity with an equity stub — so all the cash flow the entity generates goes to paying off debt. Now the company is at an inflection point — at ~2.5x debt/EBITDA there’s more cash to go around, which means the company finally starts paying out free cash flow. Bloomberg projects +$1.4bn in operating income for FY25, which is a far cry from this year’s $321mn. That’s the beauty of paying down debt.
It’s no surprise that John “Darth Vader” Malone sits on the board of WBD, and is a significant minority shareholder⁴. He’s probably the best financial engineer of his time — a chronic dealmaker, often with frustratingly complicated ownership structures (for instance, Malone also effectively controls Formula One — yes, the sport — via Liberty Media Formula One, which is a listed tracking stock⁵. It was an audacious bet to merge Discovery with Warner — especially because of the debt burden — but now we are finally starting to see some kind of payoff, after massive cost-cutting and being universally hated by Hollywood. Here’s a couple of catalysts that I find interesting:
Spinning off the cable assets.
WBD owns a bunch of linear cable assets, which are like a melting iceberg that continue to shrink in the cash they produce. The board has said they’re going to spin ‘em off into a seperate entity (much like Comcast is planning to do with theirs). By doing this you get rid of the iceberg, and you can shift some of that debt to the new company.
2). Max, their streaming service, is growing a lot faster than people expected.
In Q4, Max added +7.2mn subscribers, bringing their total subscriber base to 110mn. That’s a faster rate than Netflix for the same quarter. Remember that Max has HBO plus a whole lot of other things (including, yes, The Big Bang Theory). There’s a lot of runway for growth — Netflix has +300mn subscribers. The Max streaming business is solidly EBITDA-positive now, making $409mn in adjusted EBITDA in Q4 (well ahead of Wall Street estimates, which were in the $200mn range).
The debt burden lessens, creating more cash flow.
See above.
You know, the stock was at $5.00 at one point. It sits around $9.89 right now. It’s hard to ascribe a value to it because the question is: what does the spinco (the linear assets, the melting iceberg) look like; and at what rate does the streaming business grow, plus the debt gets paid off. Deutsche Bank has a price target of $14.00 for it — it’s really a question of projecting into the future (all investment is) and how confident you are about that. Certainly, Zaz and co at WBD have proven they can engineer the company — against all odds — to pay off huge amounts of debt. And they’ve proven that Max as a streaming service can work in a crowded market. Perhaps confidence is not misplaced.
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