Gunnar Wiedenfels, finance chief of Warner Brothers Discovery, said this would be “a messy year” as he unveiled debut quarterly results. WBD combines Discovery, the cable TV titan, and Time Warner, the Hollywood castoff of telco AT&T. It has had an inauspicious start. A high-risk deal announced 14 months ago looks increasingly dicey.
The merger closed earlier this month, creating a juggernaut worth more than $100bn. A week afterwards, streaming industry leader Netflix reported a disastrous quarter and said it would lose 2mn subscribers in the next three months. Two days later, WBN shuttered its CNN+ news streaming venture. Hundreds of millions of dollars of investment had produced minimal viewership.
WBD’s group audience numbers were better. Between them, Discovery and Warner Media’s flagship product HBO Max added 5mn streaming subscribers in the last quarter. That took their collective user base to over 100mn, around half the total for Netflix.
The additions did not come cheap. Warner Media generated roughly $40bn in annual revenue. WBD boss David Zaslav said that translated into almost no free cash flow.
Leverage at WBD has soared to nearly five times debt to ebitda. The company’s shares are already down more than a tenth this year. WBD claims a bright spot is that estimated deal benefits of $3bn may well be conservative due to the apparent profligacy at Warner Media.
The core Discovery pay TV business is a cash machine, thankfully. The company is known for lowbrow, low-cost fare which will not win prestige awards. But it helped contribute to a business that generates $3bn in annual cash flow. Discovery’s thinking was that with pay TV profitable but declining, it needed to make a big bet to acquire one of the ostensible winners in the streaming wars.
Warner Media’s HBO might well be a prize. But the company’s recent misadventures at CNN demonstrate the risks in video streaming.
Telcos used to be denigrated as “dumb pipes”. Warner Media’s former owner, AT&T, has long been a stock market laggard. It now looks wise for sticking to selling mobile phone and internet services.
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