An Avalanche at Paramount, Comcast and its divorce from streaming, and Warner Brothers Discovery's cognitive dissonance when it comes to debt.
The second Paramount Global finds a new home/owner, the turmoil commences. Those who will jump head first into the storm: Comcast, Warner Brothers Discovery, Universal, and the previously mentioned: Paramount.
Let's start with a breakdown.
Starting with Paramount Global, a subsidiary of National Amusements, the studio has been actively seeking acquisition opportunities for quite some time. Recent reports suggest that Warner Bros. Discovery is considering a potential merger—an announcement of substantial significance, as it could catalyze further consolidation within the industry.
However, Warner Bros. wasn't the sole contender eyeing Universal. In late 2023, Skydance Media and RedBird Capital Partners expressed interest in acquiring a majority stake in NAI, Paramount's parent company.
The natural question arises: Why the hesitancy? Paramount Studios is burdened with a significant debt load, placing immense pressure on the company to secure a strategic partner or buyer. According to Paramount Global’s latest financial reports, the total debt amounts to $16.97 billion. Specifically, "Redstone’s holdings are grappling with serious economic pressures, including long-term debt obligations and the volatile advertising market for media companies like Paramount." (NYT)
This situation prompts several considerations. Does Skydance possess the capacity to absorb Paramount Global and its associated entities (MTV, CBS, etc.)? Moreover, can Warner Bros. Discovery and David Zaslav navigate the complexities of a merger?
Turning our attention to WBD’s balance sheet, it's essential to bear in mind that acquiring a media company for vertical synergies has historically proven challenging.
A brief historical overview of WBD: In 2001, Time Warner sold for $164 billion to AOL in the hopes of pioneering the digital age. Regrettably, this move, as described by Jeff Bewkes, turned out to be the "biggest mistake in corporate history." Fast forward to 2018, and WarnerMedia found itself under the ownership of AT&T for $85 billion. By May 2021, AT&T, feeling uneasy about its acquisition of such a media giant, engaged in talks with Zaslav and Discovery Inc. for a potential merger.
This move led to Zaslav assuming the role of head at Warner Bros. Discovery—a recent publicly traded company and a true spinoff orchestrated by AT&T.
However, the path for WBD/WB has encountered its fair share of challenges. The spinoff imposed a significant debt burden, posing a fundamental obstacle to WBD's strategy centered on cash generation and debt reduction. Considering the potential acquisition of a heavily indebted company like Paramount, this venture appears to be a precarious move that few investors with leverage would be willing to endorse for WBD.
Shifting focus to Comcast, the proprietors of NBCU, the company has been actively pursuing major deals, including the potential acquisition of Entertainment Arts and Paramount Global. Moreover, the conglomerate has relinquished control of Hulu entirely to Disney and now awaits the valuation of its one-third stake in Hulu.
With Hulu now off its hands, Comcast may be inclined to embark on an acquisition of Paramount's magnitude.
So here is where we see things going in 2024 for the studios:
Skydance and RedBird will acquire Paramount Global, while Warner Bros. Discovery is strategically focusing on reducing debt and defining its future in Hollywood.
Comcast is expected to make a smart move by transferring Hulu to Disney. Subsequently, their attention will shift towards Peacock, contemplating how to address the $2.8 billion loss incurred in 2023. Ditching Hulu marks the first step in Comcast's plan to distance itself from financially unstable streaming services. The subsequent move may involve reevaluating Peacock—considering whether it's time to ‘put the bird down or let it fly over to a new nest.’ Once again, the financial viability of streaming remains a challenge for all except Netflix.
Impressive M&A analysis of the industry here!