January 31, 2023
Warner Bros. Discovery CEO David Zaslav’s high precedence: Money move

David Zaslav

Olivia Michael | CNBC

A couple of months in the past, after a prolonged and sobering evaluation of Warner Bros. Discovery‘s enterprise, Chief Govt David Zaslav gave his division heads a cutthroat mission.

Fake your models are household companies, Zaslav stated. Begin from scratch and prioritize free money move, he added, in keeping with individuals accustomed to the matter. Then, Zaslav stated, come again to me with a brand new strategic plan in your unit.

Zaslav’s directive has led to what’s going to quantity to 1000’s of layoffs on the firm by the center of this month, stated the individuals, together with substantial strategic adjustments at CNN, the Warner Bros. movie studio and different divisions.

The CEO shaped his plan after he took a tough have a look at the funds of the mixed WarnerMedia-Discovery, a deal that closed in April. Zaslav decided the corporate was a multitude. AT&T mismanaged WarnerMedia by neglect and profligate spending, he’d determined, in keeping with individuals accustomed to his discussions. The individuals requested to not be recognized as a result of the talks have been non-public.

Warner Bros. Discovery’s complete debt of about $50 billion was tens of billions greater than the corporate’s market capitalization. About $5 billion of that debt is due by the tip of 2024 after paying off $6 billion because the shut of the merger. The corporate might push again the maturity on some bonds if crucial, however rates of interest have risen dramatically, making refinancing a lot costlier.

To pay down debt, any firm wants money — ideally, from operations. However the near-term developments urged Warner Bros. Discovery’s enterprise was getting worse, not higher. The corporate introduced free money move for the third quarter was adverse $192 million, in comparison with $705 million a yr earlier. Money from working actions was $1.5 billion for the primary 9 months of 2022, down from $1.9 billion a yr earlier.

Together with the rise in charges, Netflix‘s international income and subscriber progress had slowed, prompting buyers to bail on peer shares — together with Warner Bros. Discovery, which had spent the previous three years growing streaming companies HBO Max and Discovery+. Furthermore, the promoting market was collapsing as company valuations flagged. Zaslav stated final month the advert market has been weaker than at any level in the course of the 2020 pandemic.

Warner Bros. Discovery shares have fallen greater than 50% since WarnerMedia and Discovery closed the deal in April. Its market worth stands at about $26 billion.

Along with job cuts, Zaslav’s directive spurred the elimination of content material throughout the corporate, together with scrapping CNN unique documentaries, Warner Bros. killing off “Batgirl” and “Scoob 2: Vacation Hang-out,” and HBO Max eliminating dozens of little-watched TV sequence and flicks, together with about 200 outdated episodes of “Sesame Road.”

The fast choices allowed Zaslav to benefit from tax efficiencies that include adjustments in technique after a merger. Warner Bros. Discovery expects to take as much as $2.5 billion in content material impairment and improvement write-offs by 2024. The corporate, which has about 40,000 staff, has booked $2 billion in synergies for 2023. Total, Zaslav has promised $3.5 billion in value cuts to buyers — up from an preliminary promise of $3 billion.

The underlying rationale behind Zaslav’s cost-cutting technique centered on turning Warner Bros. Discovery right into a money move generator. Not solely would money be wanted to repay debt, however Zaslav’s pitch to buyers could be to view his firm as a shining mild within the altering leisure world — a legacy media firm that truly makes actual cash.

“Try to be measuring us in free money move and EBITDA [earnings before interest, taxes, depreciation and amortization],” Zaslav stated an investor convention run by RBC Capital Markets final month. “We’re driving free of charge money move.”

Zaslav is making an attempt to present Warner Bros. Discovery a head begin on what could also be a yr of downsizing amongst massive media and leisure corporations. His technique seems clear: Money technology will coax Wall Road into seeing his firm as an business outperformer. However he’ll must hold collectively an organization made up of tens of 1000’s of ex-Time Warner after which ex-WarnerMedia staff who’ve been by spherical after spherical of reorganizations and layoffs.

“It is not going to be in a single day, and there is going to be lots of grumbling since you do not generate $3.5 billion of working synergies with out, you understand, breaking a number of eggs at present,” Warner Bros. Discovery board member and media mogul John Malone informed CNBC in an interview final month.

Money guidelines every thing

Liberty Media’s John Malone

Michael Kovac | Getty Images

Second, he wants it to prove that a modern media company that’s spending billions on streaming video can also generate billions in cash flow. The company has estimated 2023 EBITDA will be $12 billion. Warner Bros. Discovery will generate more than $3 billion in free cash flow this year, about $4 billion next year and close to $6 billion in free cash flow in 2024, according to company forecasts.

That would give Zaslav a selling point to investors compared to other legacy media companies. Disney has generated just $1 billion of free cash flow over the past 12 months and analysts estimate the company will have about $2 billion in 2023. That’s despite growing Disney+, its flagship streaming service, by 46 million subscribers during the period and owning a theme park business that generated $28.7 billion in revenue for the fiscal year — up 73% from a year earlier.

The low free cash flow relates largely to the money drain from streaming services and Disney’s large investments in theme parks. Over the past 12 months, Disney had $4.2 billion in operating income from its media properties, down 42% from a year ago. Returning Disney CEO Bob Iger said in a town hall last month he will prioritize profitability over streaming growth — a change from when he left the post in 2020. Outgoing boss Bob Chapek put into place a Dec. 8 price hike for Disney+ and other streaming services to accelerate cash flow.

“Discovery was a free cash flow machine,” Zaslav said earlier this year of his former company, which he ran for more than 15 years before merging it with WarnerMedia. “We were generating over $3 billion in free cash flow for a long time. Now, we look at Warner generating $40 billion of revenue and almost no free cash flow, with all of the great IP that they have.”

Wall Street vs. Sunset Boulevard

When AT&T announced it was merging WarnerMedia with Discovery Communications last year, Zaslav immediately went on a Hollywood “listening tour,” sensing an opportunity to become the new king of Tinseltown. Many Hollywood power players thought Zaslav would dedicate his first year as CEO to currying favor with the industry given his lack of history with scripted TV or movies. He even bought producer Bob Evans’ house for $16 million in Beverly Hills, a sign some thought meant he wanted to be Hollywood’s next mogul.

A year later, Zaslav isn’t the king. In fact, many consider him a villain.

It turned out Zaslav’s top priority as CEO of a large public company wasn’t to win over Hollywood. Rather, it was to convince investors his company could survive and flourish as a relative minnow against much larger sharks, including Apple, Amazon, Disney and Netflix, in an entertainment world that’s quickly moving to digital distribution.

Zaslav’s focus on investors before Hollywood makes business sense. The company must be financially sound before it can make big investments. But he’s taken a hit, reputationally, with some in the creative community.

“HBO Max is widely acknowledged to be the best streaming service. And now the execs who bought it are on the verge of dismantling it, simply because they feel like it,” tweeted Adam Conover, the creator and host of “The G Phrase” on Netflix and “Adam Ruins All the things” on HBO Max, in August. “Mergers give only a few rich individuals MASSIVE management over what we watch, with disastrous outcomes.”

One Hollywood insider who met with Zaslav to present him recommendation earlier than he stepped into the job stated the Warner Bros. Discovery CEO has ignored 90% of his recommendation on methods to handle the enterprise.

Time will inform whether or not Zaslav’s year-one choices have lasting ramifications with a spurned Hollywood group. Critics of Iger at Disney initially stated he lacked “inventive imaginative and prescient” when he first took over as chief government almost 20 years in the past.

Zaslav can counter that Warner Bros. Discovery hasn’t decreased content material spending. The corporate spent about $22 billion on programming in 2022. However he is additionally made value consciousness a degree of pleasure.

“We will spend extra on content material — however you are not going to see us are available in and go, ‘Alright, we’ll spend $5 billion extra,'” Zaslav stated in February. “We will be measured, we’ll be sensible and we’ll watch out.”

The corporate’s content material choices have been primarily based on strategic corrections, reminiscent of eliminating made-for-streaming motion pictures and chopping again on children and household programming that do not materially entice new subscribers or maintain present ones, executives decided. Warner Bros. Discovery’s HBO continues to churn out hits, together with “White Lotus,” “Euphoria,” “Home of the Dragon” and “Succession,” underneath the management of Casey Bloys.

V Anderson | WireImage | Getty Photographs

‘We do not have to have the NBA’

Maybe Zaslav’s greatest dilemma is what to do with the NBA.

Like different media corporations, Warner Bros. Discovery rents the rights to hold video games and pays billions to leagues for the privilege. Warner Bros. Discovery at present pays round $1.2 billion per yr to place NBA video games on TNT. In 2014, the final time the league struck a cope with TNT and Disney’s ESPN, carriage rights rose from $930 million to $2.6 billion per yr.

Negotiations to resume TNT’s NBA rights will start in earnest subsequent yr. Zaslav has stated he has little curiosity in paying an enormous enhance simply to hold video games once more on cable networks — a platform that loses thousands and thousands of subscribers annually.

“We do not have to have the NBA,” Zaslav stated Nov. 15 at an investor convention. “With sport, we’re a renter. That is not pretty much as good of a enterprise.”

The issue for Zaslav is retaining legacy pay TV afloat could also be his greatest technique to hold money move coming, and placing NBA video games on TNT could also be his greatest probability to try this. Within the third quarter, Warner Bros. Discovery’s cable community enterprise had adjusted EBITDA of $2.6 billion on $5.2 billion of income. That is in contrast with a direct-to-consumer enterprise that misplaced $634 million.

If Warner Bros. Discovery goes to pay billions of {dollars} a yr for the NBA, Zaslav desires a deal to be future-focused. He has the posh of getting NBA Commissioner Adam Silver’s ear for the following three years as a result of the NBA will likely be on TNT by the tip of the 2024-25 season.

“If we do a deal on the NBA, it’ll look so much totally different,” Zaslav stated.

Charles Barkley on Contained in the NBA

Supply: NBA on TNT

Warner Bros. Discovery is aware of methods to produce NBA video games and airs a studio present, “Contained in the NBA,” which is broadly thought to be the very best in skilled sports activities. It is attainable Zaslav might strike a cope with one other bidder, reminiscent of Amazon or Apple, which can permit Warner Bros. Discovery to provide their video games whereas giving him a package deal of video games that got here with a lower cost tag.

Ideally, Zaslav want to do sports activities offers that embody possession of mental property. That is additionally interesting to Netflix, The Wall Road Journal reported final month. Buying leagues will get Zaslav out of the rental enterprise. However whereas smaller skilled sports activities leagues, reminiscent of Method One and UFC, are owned by media corporations (Malone’s Liberty Media and Ari Emanuel’s Endeavor, respectively), it appears unlikely NBA homeowners would conform to promote Warner Bros. Discovery a stake within the league.

Silver stated final month on the SBJ Dealmakers Convention he was open to rights offers structured in novel methods.

“We’re within the enviable place proper now of letting {the marketplace} work its magic slightly bit, you understand, to see the place the very best concepts are going to return from, what is going on to drive the very best worth,” Silver stated.

It is also attainable Zaslav might stroll away from the NBA fully. Whereas “Contained in the NBA” co-host Charles Barkley not too long ago signed a 10-year contract to stick with Warner Bros. Discovery, it consists of an out clause if Zaslav would not re-up the NBA, in keeping with The New York Publish.

Stay sports activities aren’t essentially important to most streaming companies’ success. Netflix, Disney+ and HBO Max all have zero dwell sports activities — at the very least for now.

The one certainty is Zaslav’s resolution will likely be squarely primarily based on how a deal impacts the corporate’s free money move.

“It is how a lot can we make on the game?” Zaslav stated. “After I was at NBC, after we misplaced soccer [in 1998], we misplaced the promotion of the NFL, which was an enormous concern. Then you will have the general asset worth with out the game. So it’s important to consider all that.”

WATCH: John Malone on streaming platform distinctions

Warner Bros. Discovery CEO David Zaslav’s high precedence: Money move

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