Warner Bros. Is Officially for Sale. It's Paramount vs. ... Whom?

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1:29All new Sundays at 9, exclusively on AMC and AMC+. Stream now. It is Wednesday, October 22nd. It's been less than three months since the Paramount studio finally changed hands after 18 months of ups and downs and Trump and nonsense and such. And now we're going to do it all over again. On Tuesday, our guy David Zasloff, he sent up the bad signal and made it official what we all kind of know. Warner Brothers Discovery is for sale. Zaslav had wanted to wait to sell stuff until he split the company into the good side, like HBO Max and Warner Film and TV Studio, which he would run, and the bad cable networks, which he wouldn't.

2:09But now the board said they've received inquiries for all or some of the company and would review, quote, strategic alternatives, the dreaded words. That means selling everything now or parts of the company now or waiting until the split. They can still do that. The caveat there is that if someone were to buy the good assets before the split, they'd incur a tax penalty. And if the split does go forward, there would probably be a waiting period after till a deal could be beneficial for tax purposes. But the question begs, who exactly is buying this company? We know Paramount, the Ellison's, they've submitted two separate bids, the most recent for about$24 a share.

2:48The board rejected that as too low. But beyond the Ellison, it's still kind of an open question. Comcast, Netflix, Amazon, Apple. We've discussed these options before. All of them have upsides and downsides. Both Netflix and Apple have downplayed any potential bid. And remember, unlike Paramount, which drew a bunch of bidders when it was for sale, or at least people who said they were bidders, Warner's is a much bigger company. Most analysts think it'll go for about$60 billion. dollars. And thanks to its tortured history of failed mergers and acquisitions, it carries $35 billion in debt. Not something the average rich guy or publicly traded company could just pick up.

3:27Unless maybe you're the second richest person on earth. So is this all noise and the Ellisons are just going to swoop in and take it all? Or are these other bidders legitimate? The market clearly wants some deal to happen. The Warner stock at$20 today, way up from around $7 or$8 and the$11 it was at before the interest leaked in the journal. So what's next here? It's pretty complicated. So we've got Peter Cipino on the show to discuss. He's a top media analyst at Wolf Research. He covers Warner Discovery. Used to work at Allen Company. He's also covering some of the potential suitors. So today is Warner Discovery officially for sale.

4:04Who's in, who's out, and how it all plays out from here. From The Ringer and Puck, I'm Matt Bellany, and this is The Town.

4:16Okay, we are here with Peter Supino, who is Managing Director and Senior Analyst at Wolf Research. Welcome, Peter. Thank you, Matt. Glad to have you on the show because I want to talk about the potential Warner Brothers Discovery sale. And I want to do it from a little different perspective. We have been speculating, it feels like, for pretty much since this company was formed three years ago, as to who might buy this asset or these assets. I believe that the entire transaction that created Warner Brothers Discovery was done so to eventually facilitate a sale. And then they split the company into these two units of studios and streaming and then the Crapco TV networks for the purposes of either effectuating a sale of each unit or to create a more compelling narrative for Wall Street when they do eventually formally split these companies.

5:16But now we have our guy, David Zasloff, telling everybody that they are instituting a review of the assets to facilitate some kind of transaction. So can you just take us through what the nitty-gritty, bare-bones machinations of what the next six to eight months are going to be like for this company? So what's happened since? We've got news just this week that the board has turned down an offer between$23 and$24 a share, which was mostly cash. And it's, I mean, it seems extraordinary. This stock was under$7 a year ago, and it was very recently trading under$12. And so we assumed$3.1 billion of operating cost savings from the combination.

6:07We put a multiple on those savings and assigned all of that value to the sellers. So in the math that got us to$24 per share, Paramount is giving the Warner Common Stockholder all the benefits of the synergies and really owning the thing for the possibility of more combined revenue over time, which is a real possibility. And they would fire a bunch of people and save costs and all that stuff. So that was in the$3.1 billion. The idea of saving on costs was in the$3.1. We credited that to the Warner Common Stockholders, and Paramount owns it for the long-term revenue upside, and that got us to$24.

6:43Okay, and that would value the company at what, about$60 billion? Sounds about right. Okay, which brings up the topic that this is not cheap. Whoever buys this company or the parts of this company, this is not like the Paramount sale. These assets are a lot more expensive. which necessarily limits the potential buyers. And we'll get into the potential buyers at the end, but continue with how this could go. So we're going to have jockeying in the media and back and forth over which potential suitors might come forward, what Paramount is willing to up their offer to. Is this a all or nothing situation?

7:22Like, is this where they are going to entertain an offer for the whole company or proceed to the split so that they can formally get rid of the bad company and then have an auction for the studios and streamer side and then potentially have a spinoff of Discovery exist on its own and have someone buy just the quote-unquote good parts. Are those the two scenarios here? Sale of everything or split and sale of studios? Yes, those are the two scenarios. That can't happen before? Someone can't come in tomorrow and say, I'd like to buy HBO and Warner Brothers and here's a fat check and let's just do that?

8:04We think that that can happen. So the streaming and studios business definitely be sold out of global networks and global networks would be an ongoing public company. So that is on the table. The fact that they could just sell off the assets tomorrow and not wait for the split. But the more likely scenario is that David Zaslav, which the Wall Street Journal says he's in the fight of his professional life. He is trying to fend off the Ellisons long enough where he can effectuate this split, and then he will preside atop studios and streamers, and then conduct an auction for those assets. That is his preferred path.

8:47It's a little bit ironic, or at least extreme, to be calling this the fight of Zava's life, because he has a new contract with the company that incentivized him for multiple transactions. He gets paid simply for splitting up the company next year. He gets paid for accomplishing asset sales of certain magnitude. So he's going to be fine no matter what. Oh, let's not whip out the violins for David Zaslav. All right, I understand. The money that he is going to make on this transaction after managing these assets for three years into losses that are way beyond what anybody thought. I mean, this company lost two-thirds of its value under his guidance.

9:33I mean, it's kind of unbelievable that he has paid what he has paid, but that's a separate topic. Let's continue on to what actually will happen. So there's one company that seems to be in a unique position to take down all that is Warner Discovery today, and that's Paramount Skydance. And there are a couple of reasons for that, right? First, in for a penny, in for a pound. Paramount Skydance owns a whole lot of exposure to cable networks. And so they're a natural buyer of both the elegant streaming and studios assets that pair well with P Plus and the studio and also the Crabco. And presumably, whether or not Paramount Skydance buys Crabco along with streaming and studios, eventually the cable networks businesses, excluding CBS at Paramount, will probably live in a different entity with different ownership than the streaming and studios businesses at Paramount.

10:26So their ability to satisfy the interest in a bundled sale, if it's meaningful to the board, is a significant piece working in their favor. Comcast is in the exact opposite position. That's a key point because there was a Reuters piece a couple of days ago talking about how the math favors David Zaslop and the parts of the company, if they were auctioned off separately, might get them more money, but there's no indication that anyone other than Ellison wants to buy these cable networks. I mean, Ted Sarandos of Netflix said on the earnings call, we've been very clear in the past that we have no interest in owning legacy media networks.

11:05Nobody wants that. And the potential for Comcast to want them is complicated by the fact that they are currently splitting off their cable networks into Versant. And Versant might be a buyer of this, but everything I've heard from the Mark Lazarus people on that side is that they actually kind of don't want that. They're trying to create a narrative that Versant isn't just cable networks. They have other stuff there. And to saddle them with even more of this stuff, that doesn't seem like something they want, at least in the short term. And the Ellison seem willing to take these networks now. I'll take the other side of the bet if it's being offered about Versant's appetite for M &A because the Versant cable network portfolio is pretty subscale and could have some really difficult negotiations ahead of it with cable and satellite distributors.

11:58Yeah. They don't have a lot of sports. Yeah. Not a lot of sports. Not a lot of GRPs. Although neither does Warner Discovery. Neither does Warner Discovery. They do have a huge amount of GRPs. I mean, somehow the sum of all those... Just ratings. Somehow the sum of all those networks at Warner Discovery adds up to something very significant to a distributor. And that's why they were able to have surprisingly placid renegotiations with their distributors after losing the NBA. Yeah, well, they made some concessions there, I think, elsewhere. But yes, that was a surprise that they kept those carriage fees higher.

12:32But the trajectories on the Warner networks even are not great. And they bought some college football, and they have college basketball, and they have some MLB playoffs, but they do not have football. So Comcast financially would be a great solution and really a similar solution to Paramount Skydance. And Comcast has all the financial and operational reasons to behave in a way that's similar to Paramount Skydance. The difference is, of course, as you said, is that Comcast is moving down this path of a versant spin out and it's imminent. And so putting myself in the shoes of David Zasloff and the Warner Discovery board, there are lots of reasons to defer a decision, to wait to decide who to partner with until Versant has been spun from Comcast, because you'll have probably the same interest in an acquisition at Paramount Skydance and Netflix, and you'll have one more flexible, well-capitalized buyer at Comcast.

13:30And that's all you need is two bidders to create a bidding war. Absolutely. Yeah. And And the added benefit is you're David Zaslav. You get to stay in the chair longer. You get to hang out with Charlize Theron and go to premieres and host parties at Cannes. In so many ways, time is David Zaslav's friend. Yeah, you also get to keep getting paid$30 million a year the longer you drag this out. I know, although he does get paid a lot if he does a deal. All right, so I want to get into the scenarios here with the potential buyers because I have openly questioned who these buyers are going to be. I think that the fact that Warner's put out this statement saying they have multiple bidders coming forward is a bit over their skis, in my opinion.

14:15I think that this could be like having a girlfriend in Canada or in the Niagara Falls area. Until we see who these bidders actually are, I think this seems like a lot of flux. So let's go through the potential bidders because each of them, in my opinion, has a pretty big problem associated. Comcast, obviously. Let's start there. Comcast is not getting any deals done with this president. Is that right? That's probably right. They are very committed to this Versant spin out, and they're very close to finishing it. And it would be shocking to see them pause it and try to accomplish a transaction which required a change of course.

14:55Having said that, this is a really important transaction for Comcast and for Paramount Skydance. It's much more important than it is for Netflix or Amazon, which are the two other bidders I can envision. Yeah, I mean, Comcast has Peacock, which is US only and is not scaled. Like they are in real jeopardy here of being the odd man out in the streaming wars. And if Paramount and Warners get together, then those are the players. And Comcast is not a player. And let's take that a step further. What Peacock is inarguably good at is NBC Sports and Universal Films. And what Peacock struggles with is scripted.

15:35It's television. And Warner Discovery, especially HBO, is wonderful at television. And Warner has the most successful television studio outside of HBO. And so they're very, very complementary. And we always say that streaming businesses should be compared to retail. And in retail, of course, you use milk to get people in the store on it frequently. And then once they're in to buy milk, you sell them higher margin goods. And Peacock has plenty of milk in the sense that they've got sports, but they don't have much in the way of high margin goods, the scripted entertainment that Netflix specializes in to sell people who come in for sports.

16:13Yeah, exactly. But the problem they have is the Trump stuff. Trump hates them. He blames them for MSNBC, even though that's being spun off. He's investigating their DEI policies. I did see that Comcast made a very nice donation to the new ballroom at the White House that Trump is building. So maybe that is the overture to try to get on his good side. But if there was announced a merger of the companies that own CNN and MSNBC, Donald Trump would go nuts. Great catch about the donation to the White House. I hadn't seen that. Here's my vision for Comcast. First of all, Comcast has an advocate with the Trump administration in John Malone, who is an established Republican, a potential intermediary here.

17:01Didn't help last time in the first Trump administration when they tried to get the Warner AT &T deal done and Trump sued to block that. It did get done, but I take your point that it was a painful process. And then the next step I see for Comcast is the option before Brian Roberts to surrender voting control of the go-forward media company. I'm not proposing Brian would or should surrender voting control of the cable company. But if NBCUniversal, with or without Warner Brothers, were no longer Brian Roberts Media Company, but instead a shareholder-driven media company of which Brian Roberts owned his 1.5 % economic stake, Trump might treat that differently.

17:45You think so. So you think there's a path that Comcast has for these assets? It's not just that they're in the game potentially to bid it up and make everybody pay more. That happened with Disney and Fox. Yes, that could be Netflix's gambit. In the case of Comcast's interest here, I believe they're deeply serious. They haven't said anything. So this is Jeff Peters' opinion. But the way they pursued Disney and Fox, in my view, was driven by the same appetite for assets and for scale, rather than simply to bid up the cost for Disney. One more thing I want to say about this potential deal is that Comcast has an ability to pay for it, which might be underappreciated by some.

18:28Were Comcast to just issue cash for Warner Discovery at the valuations that are being talked about, the company's debt-to-EBITDA ratio, their leverage would approach four times pro forma. And that's a big number for Comcast, which isn't really growing very much. Right. Their stock's down 27 % in the past year. It's five and a half times EBITDA. It's seven times earnings. It's one of the 15 cheapest stocks in the S &P 500. And so they're really not in a position to be issuing equity at that multiple, nor to be leveraging to four times in our view. And so the alternative they have that they can act upon is to create an NBC universal stock that could trade much closer to Disney because the assets are more similar than different to Disney.

19:10And Disney trades for twice the multiple Comcast nearly 12 times EBITDA. Disney has much better theme park assets. They have much bigger television assets. The film studios, I guess they're comparable. But I don't know. Is that, I mean, you think they would trade similarly? You're absolutely correct about the relative assets or the asset comparison. And our point is that somewhere between 12 times EBITDA at Disney and eight times EBITDA at Paramount Skydance, there's a level for NBCUniversal that is much higher than Comcast's current 5.5 times EBITDA. So that currency could be the unlock for Comcast in getting a real offer on the table.

19:53It's funny because they don't even have a CEO of NBCUniversal. Well, imagine, maybe that could be David Zasloff. Oh, that would be amazing.

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21:15Netflix has been pretty clear now. Greg Peters, the co-CEO, he said last week that media mergers like this don't work out. Usually we're builders, we're not buyers. Ted Sarandos, as I said, said that they're not interested in legacy networks. The thinking is, is that for the right price, Netflix would be interested in just the studio, right? HBO is sort of an awkward fit with them. What are they going to do with HBO? They already are the leader in streaming. They could buy the library of shows and put them on Netflix. But a lot of the value of HBO is in the brand of HBO and the ability to make new shows.

21:54And I don't know that Netflix even wants that. I think they would just want the library and they want the IP of Warner Brothers. They would shut down the Warner Brothers studio and the theatrical distribution. They did not want movies and theaters. So that would be a complete disaster for Hollywood. It would absolutely lose that Warner Brothers legacy theatrical studio unless they put some nominal movies and theaters. But the idea is that for the right price, Netflix would scoop up the Warner IP. You agree there? Yes, full stop. For the right price, Netflix would love to own this IP. And they said it without saying it yesterday on the call in the form of a non-denial.

22:37Historically, Netflix has said that they think that M &A will significantly change competitive dynamics in streaming. They reiterated that yesterday, but they also moderated their stance and left the door open for a bid for Warner. Now, the question which we shall be asking is, do they really want to own it or do they just want to drive up the price for whoever buys it? I'm thinking back to historical events like you mentioned Disney, Fox and Comcast and the way those asset values spiraled. And I'm thinking of the 5G auctions and the way T-Mobile bought very little from the C-band auction and forced Verizon to pay a huge price.

23:13So companies definitely think like this. But again, going back to your question, I do believe there's a really strong argument for Netflix to own these assets, but they should be price sensitive about it because buying Warner Discovery for Netflix is playing offense. It's not playing defense. They don't need it, but they are the most qualified buyer of it. Yeah, I've made this argument. I don't think they ultimately want it. I mean, yeah, it would be nice to have superhero IP and it would be nice to own that HBO library. But like that is just such an awkward integration. HBO is like the premier TV brand.

23:51And to just buy it to ingest their shows and kill the brand or have to put it as like a tile on Netflix. like they're all about simplicity. Netflix is Netflix. They don't want it to be like, come to Netflix and then also you get the HBO shows if you click here. Like, I just think that's weird. And the studio for that price for Netflix to make a really significant acquisition like that, are they going to do that just to shut down the studio and take all the IP and take the library and put all the Warner films on Netflix? Like at least David Ellison is talking about running Warner Brothers as a theatrical studio.

24:33Maybe, you know, it would obviously just be a label under Paramount or a Skydance Corporation, as they call it. But at least it would be a going forward studio. Under Netflix, I think that that just goes away. And that triggers all kinds of antitrust concerns. The guilds would go nuts. The theaters would go nuts. I just think that it's messy for Netflix. It would be. The town, not your broadcast, but your listeners would absolutely hate it. But you know what? Ted Sarandos would get a very nice office on the Burbank lot. It's a beautiful lot. He could sit behind Jack Warner's desk like David Zaslav does and be very happy with himself.

25:12Your point about HBO is an interesting one because FX has existed and persisted within Disney as sort of a discreet operation, a boutique operation within a massive organization. And I think it really is reverence for Landgraf and the way he runs that business. Because that's awkward too. And that's not Netflix's way. And Hulu gets away with that because Hulu is not the brand of Netflix. And Disney's whole thing is they have these different brands. Has Netflix indicated in any way that they want the Netflix brand to have sub-brands like that? No. No, the only thing that they've done that could rhyme with sub-brands is the inclusion of a broadcaster's stream in their French business.

26:00And they've said that they're interested in doing deals like that around the world, assuming success in France, so that they would have more sports content under local broadcasters' names in a cost-effective way. It's a different strategy, but it rhymes. Yeah. Okay, so the others would potentially be Apple, which Eddie Q basically said on this show last week that they are not really interested. They did leave the door open. They'll look at everything, but not interested. I don't see that as something that they would want at this point. But there's an angle that Netflix has that Apple doesn't have, and that is permanently removing 17 % of all the major movies that have ever been made in the United States from the licensing market.

26:44that's a competitive chess play that isn't really relevant to Apple because it doesn't have the distribution Netflix has. Well, it could be Apple finally saying, we actually give a shit about this business. And here's how serious we are. We are buying Warner Brothers and putting all the movies on Apple TV. Yeah, if they want to go ahead and take that level of risk, yes, there could be a big change in Apple's business. I just don't see it. And then anytime Apple buys something, it just puts a spotlight on them and the government will look at it and they they're they're a phone maker like i don't think they want to deal with that so let's move to amazon amazon is the interesting one here because they have shown an interest and they have a past history of buying mgm i don't think the integration of mgm into amazon studios went as smoothly as they might have thought it was i don't think they have at least so far extracted the value out of mgm that they thought they might.