Bloomberg Intelligence sees shrinking synergy for Warner Bros. Discovery

This year’s most-anticipated media merger got another negative review Wednesday when Bloomberg Intelligence analysts hedged their near-term expectations for Warner Bros. Discovery.

In a report shared Wednesday, Geetha Ranganathan, senior industry analyst, and Kevin Near, senior associate analyst, suggested the merged company’s debt would be a heavier stone to carry up a steeper hill.

“Warner Bros. Discovery faces daunting challenges, including a messier-than-expected merger, and a cut to Ebitda guidance amplifies anxieties around its $53 billion debt load, two overhangs unlikely to clear soon amid a lack of catalysts and uncertainty over strategy and execution,” the two wrote. “All this comes amid a streaming slowdown and legacy TV headwinds that are bedeviling all media.”

They wrote that WBD’s efforts to lighten that load—it’s set a goal of reducing its leverage from 5x down to 2.5x to 3x by the end of 2024—“could be a stretch.”

In particular, the analysts noted WBD’s current reliance on the Discovery half of the merged firm—in its Q2 earnings call, company executives predicted that all of the company’s forecast $9.5 billion in 2023 earnings before interest, taxes, depreciation, and amortization would come from Discovery. Ranganathan and Near see such risk factors here as faster cord-cutting leading to lower affiliate fees and an expected decline in Q3 ad sales worldwide.

They also warned that sports rights could throw a wrench into WBD’s machinery, citing the potential of an NBA rights renewal after the 2024-25 season tripling its current $1.2 billion annual fees.

As for the streaming future the company is navigating towards, the analysts think WBD’s 2025 objective of 130 million streaming subscribers worldwide remains “very achievable,” especially with a short-term boost from the debut of such new content as “House of the Dragon,” which drew 10 million viewers on its Sunday debut.

That debut, however, also featured streaming glitches and followed a bumpy few months for HBO Max that included staff layoffs and the removal of both original and library content from the service.

In an email, Ranganathan predicted more potholes in the road ahead as WBD prepares to merge HBO Max and Discovery+ into a single service next year.

“The company’s focus is clearly trimming the fat and lowering costs so it is going to be a bit of a rough ride,” she wrote, predicting that while trying to preserve HBO’s reputation for quality content, management will “scrap projects that they feel don’t give them enough bang for the buck but round it out potentially with low-cost non-fiction programming from Discovery.”

With income as the North Star metric—company guidance calls for streaming Ebitda of some $1 billion by 2025, with long-term margins of 20%—HBO’s new bosses may opt to give up that goal of 130 million subscribers. Wrote Ranganathan: “If they have to sacrifice some subscriber growth, they will do that rather than splurge on content.”