Paramount Skydance’s loss could be private equity’s gain.
After announcing it was putting itself up for sale in mid-October, Warner Bros. Discovery has given itself until Christmas to reach some kind of deal, CNBC reported Wednesday.
The iconic Hollywood studio, whose properties also include HBO and CNN, has reportedly rebuffed Paramount Skydance three times. The David Ellison-run media conglomerate last offered to buy WBD for $23.50 per share in early October, according to The New York Times. That would’ve valued the company at around $58 billion—a 35% hike from the $43 billion Discovery paid AT&T in 2022.
But Warner Bros. thinks it can get a better deal—and it’s entertaining all options. In an October statement, the company said it would explore a full buyout, the sale of part of its business, and a separation of Warner Bros. from Discovery.
The company did not respond to a request for comment on the matter.
Analysts and investors agree there are two scenarios in which PE buyers could succeed—neither of which involves buying the entire company.
The company is still saddled with around $37 billion in debt, and profits can be unpredictable due to the nature of filmmaking. Those conditions are not ideal for firms that prioritize investing in stable, yield-generating businesses.
“You’re going to need a significant amount of capital and a significant amount of savviness,” said Emile El Nems, senior credit officer at rating agency Moody’s, of a full-scale buyout. “A strategic buyer has the ability to create synergies that private equity cannot.”
PE buyers could tune into WBD’s TV portfolio
The likeliest option, investors and analysts say, is the carveout of WBD’s cable TV portfolio, which includes channels such as HGTV, TBS, Food Network and Magnolia Network.
Before talks of a sale, WBD was actively pursuing a split that would have created two separate companies: one a streaming and movie studio business, the other a global networks business, which would include all of its television properties and CNN.
Despite a shifting media landscape where fewer people are subscribing to cable, purchasing WBD’s portfolio could be a tantalizing entry point into the entertainment business for PE operators, said S&P Global media analyst Scott Robson.
Contractually guaranteed advertising revenue and distribution fees, which carriers pay to TV networks for the right to include their channels, have remained healthy. For the last two years, WBD’s cable ad revenue has remained at around $5 billion, despite concerns that a shrinking cable base could make a bet on the TV business risky.
“There’s this thesis that selling the parts off may drive more shareholder value in the end,” said Alphonse Lordo, partner at Content Partners Capital, a PE firm that invests in entertainment IP. “Selling off some of those assets—some of which private equity likes a lot—makes complete sense.”
WBD’s vast IP library could also be appetizing
WBD’s IP portfolio is filled with iconic franchises, from Harry Potter to DC superheroes to the Looney Tunes. Investors say PE buyers could cash in on these established brands by scooping up their IP rights.
“The underlying pin of all of their value is their IP,” said Lordo of Content Partners Capital. “Their library is the most valuable piece of it all, but it’s intangible, so some people can’t get their hands around that,” he said.
Lordo said that one of the reasons IP investment can be tricky to value is the need to manage how that content gets licensed to a broad array of third-party broadcasters and streaming services.
That’s what potentially makes WBD’s gaming portfolio a more tangible investment proposition. The WBD gaming division publishes games through a relatively small, set distribution network made up of the major video game console makers, such as Nintendo and PlayStation.
WBD owns several studios, such as TT Games, which has long held licenses to develop Lego video game adaptations of properties like Harry Potter, The Lord of the Rings and Batman. The division also owns the rights to games such as Mortal Kombat, a popular fighting game series.
WBD’s gaming practice has been a target of offers before. In 2022, Electronic Arts and Amazon reportedly made bids independently to acquire the nine studios that WBD owns, but no deal was ever announced.
After EA’s record $55 billion buyout, PE investors could be circling more gaming investments, though it’s uncertain whether WBD would entertain a deal that includes access to IP rights or just ownership over WBD’s nine studios.
The key to investing in IP is understanding the property being bought and how, in a fast-changing entertainment landscape, the assets’ value is likely to evolve, said Bobby Sharma, founder and managing partner of Bluestone Equity Partners, which invests in the sports, media and entertainment sectors.
“The question isn’t whether WBD is valuable,” he said. “It’s who can extract that value efficiently from the pieces in a changed distribution landscape.”
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