Warner Bros. Discovery is relying on deregulation to unlock media offers — if there's even urge for food

Comcast Chief Government Officer Brian Roberts had a not-so-subtle message this week for Warner Bros. Discovery CEO David Zaslav: When you’re promoting, I am not shopping for.

“As an alternative of participating in a course of to purchase content material corporations, we’ve got targeted totally on natural alternatives just like the NBA,” Roberts mentioned Tuesday throughout Comcast’s second-quarter earnings convention name.

When you ask Zaslav, although, the explanation Roberts and different potential patrons of media belongings aren’t is as a result of the federal government has scared them away.

Zaslav earlier this month publicly said a theme that many legacy media executives have privately mentioned for years: The present U.S. administration has stymied deal-making, and enterprise leaders are determined for the subsequent U.S. president to usher in additional mergers and acquisitions.

“We simply want a chance for deregulation, so corporations can consolidate and do what we must be even higher,” Zaslav advised reporters at Allen & Co.’s annual Solar Valley convention.

Roberts’s disinterest and Zaslav’s lament shine a light-weight on a basic query that will decide the way forward for the media and leisure trade: Do the most important media and expertise corporations wish to purchase smaller rivals for his or her content material and might’t accomplish that due to overly stringent laws, or are they merely uninterested within the belongings?

Exhibit A: Throughout months of Paramount Global sale conversations, controlling shareholder Shari Redstone engaged with dozens of potential patrons earlier than touchdown on a take care of Skydance Media, a comparatively small studio that earlier this month agreed to purchase a controlling stake in Paramount with out buying the whole firm.

Redstone obtained scant curiosity from huge media and tech gamers who may have used her firm’s film and TV studio and library to bolster their very own streaming providers, in response to individuals aware of the matter. The sale course of proved the most important media and expertise did not need Paramount.

Different corporations, akin to Starz, AMC Networks and Vice Media, have additionally looked for deeper-pocketed patrons and are available up empty.

There are two believable explanations for why bigger media and expertise corporations aren’t , mentioned Rob Kindler, international chair of M&A on the legislation agency Paul, Weiss.

“Both they do not need the belongings, or they’ve determined the regulatory hurdles are too excessive,” Kindler mentioned.

A push towards deregulation will give the media trade extra readability. It is doable expertise and the most important leisure corporations have sworn off important media belongings as acquisition targets given the governmental pink tape round antitrust, nationwide safety and antiquated communications guidelines.

Or, maybe, legacy media corporations are merely undesirable belongings to personal.

Now, Zaslav sees the identical dynamic repeating with Warner Bros. Discovery, whose shares have fallen 36% prior to now yr as the corporate focuses on turning its flagship streaming service Max right into a globally profitable business and grapples with the opportunity of losing NBA media rights after practically 40 years as a accomplice.

A technique of doing that may be to search out an acquirer with a trillion-dollar valuation to assist pay for costly content material, akin to Amazon, Apple or Google. Zaslav may additionally merge Warner Bros. Discovery with one other legacy media firm, akin to Paramount Global, Fox or Disney, or NBCUniversal, if it had been spun off from Comcast.

Zaslav’s perspective on deregulation in media — {that a} lighter contact would inherently imply extra big-money offers — is tantamount to life or loss of life for legacy media.

His stance is that consolidation is the one path ahead for not solely his personal firm however all legacy media corporations that are not Apple, Google and Amazon, in response to an individual aware of his pondering.

His message may very well be persuasive with politicians who wish to save native information and tamp down the ability of massive expertise. If the most important corporations on this planet throw tens of billions of {dollars} at the most well-liked stay sports activities rights, it is doable, if not possible, that the legacy media trade is on a sluggish loss of life march to obscurity.

In accordance, Warner Bros. Discovery has sought to sue the NBA as a last-gasp effort to keep up the corporate’s standing as a platform to air stay video games after the league selected the deeper-pocketed, bigger Amazon as its partner of choice.

Zaslav declined to remark for this story.

In 2018, Zaslav’s Discovery accomplished its acquisition of Scripps Networks Interactive for $14.6 billion. Three months later, AT&T closed its deal to amass Time Warner for $85.4 billion.

In 2022, the mixed Discovery-Scripps then merged with WarnerMedia valuing the company at $43 billion.

Right this moment, the whole market capitalization of Warner Bros. Discovery is about $20 billion. The varied mergers have saddled the corporate with about $40 billion in debt.

Different huge media offers have not labored out a lot better. Viacom and CBS merged in 2019, valuing the mixed firm at about $30 billion. Paramount Global (the brand new title of the mixed firm) now has a market capitalization of about $7 billion.

Disney acquired the vast majority of Fox’s belongings for $71 billion in 2019. There’s little doubt the worth of the belongings have dramatically declined prior to now 5 years. Disney’s market capitalization is decrease now than it was when the deal closed.

As an offshoot of the Disney-Fox deal, Comcast acquired Sky for $39 billion. That, too, seems to have been a major overpayment. Comcast wrote down $8.6 billion of Sky’s worth in 2022.

Whereas it is clear none of those mergers have been winners, it is solely truthful to evaluate them versus what would have occurred to the businesses had they stayed unbiased, mentioned Kindler.

“Whereas it seems that many of those offers have not labored nicely, what would have occurred if they hadn’t completed these offers? That’s the actual query,” Kindler mentioned.

There aren’t many smaller media and leisure corporations which have tried go-it-alone methods in recent times, however of those which have (or, have as a result of they could not discover a purchaser), the outcomes have been tough for shareholders. Shares of AMC Networks, proprietor of cable networks together with AMC, IFC, We TV, and Sundance TV, are down about 80% within the final 5 years. Lionsgate inventory is down greater than 35% in the identical interval.

The S&P 500 has gained 81% over the identical time span.

There’s additionally been combined leads to President Joe Biden’s administration. A federal decide blocked the $2.2 billion sale of Simon & Schuster to Penguin Random Home on antitrust grounds final yr, however Amazon’s $8.5 billion deal for MGM bought approval.

Additional complicated issues, Trump’s vice chairman nominee, JD Vance, has publicly mentioned he largely helps Federal Commerce Fee Chair Lina Khan’s aggressive rhetoric on the subject of limiting company energy by mergers.

“I have a look at Lina Khan as one of many few individuals within the Biden administration who’s doing a fairly good job, and that units me other than most of my Republican colleagues,” Vance mentioned earlier this year at RemedyFest, a dialogue discussion board on regulatory challenges. “You wish to promote as a lot competitors as doable, and also you truly wish to separate all of those market verticals as a lot as doable. That is the place I believe antitrust might be probably the most helpful method to consider an answer to what we face.”

The now-de facto Democratic presidential nominee Kamala Harris will probably be quizzed on her regulatory philosophies within the coming months by the enterprise group.

Even when Zaslav is true, and deal quantity is down due to regulatory considerations, “it is unclear if something will change considerably with a brand new president,” mentioned Kindler.

From Sept. 30, 2022 to Sept. 30, 2023, federal businesses challenged simply 17 transactions — the bottom variety of merger enforcement actions within the final 20 years, according to the legislation agency Covington & Burling.

Nonetheless, when isolating only for media offers, the amount of offers accomplished as measured by greenback worth has noticeably slumped, illustrating the slowdown in bigger transactions. Final yr’s whole media deal quantity was $51 billion, and 2022’s was $35 billion, nicely under the median of $85 billion from the seven years prior, in response to Dealogic.

The rut seems more likely to proceed, with simply $22 billion in media offers introduced to this point in 2024.

Furthermore, merely judging transactions primarily based on whether or not or not they finally get accredited won’t be one of the best metric. Legacy media corporations could also be scared away from trying transformational transactions as a result of the time of approval is so prolonged. Skydance Media and Paramount International guessed their merger could be accredited by September 2025, greater than a yr after the deal’s announcement. The lengthy lag time places each acquirer and vendor in an undesirable state of paralysis, unable to completely plan a future collectively.

— CNBC’s Lillian Rizzo contributed to this report.