Warner Bros Discovery (US:WBD) has spent the past month in the unusual position of being courted rather than criticised. After announcing a formal sale process in October, we are now at the stage where first-round bids have been submitted to meet a deadline that fell on 1 December.
WBD is sorting through a mixture of full-company offers and more selective attempts to prise away parts of the studio and its streaming assets.
Whatever emerges from the negotiations, the more interesting angle is not who might end up owning WBD, but why so many large media and technology groups feel compelled to take an interest in this ungainly, debt-burdened conglomerate.
Whether long-suffering investors feel the same way about the company is a moot point, but it is difficult to argue with the impact on the share price. Having risen sharply on the company’s original plan to break itself up this summer, shares have now more than doubled since June as interest from other parties becomes clear. The valuation has almost doubled as the market bought into the idea. It is merely a question now of who comes up with the best offer.
It’s the intellectual property, stupid
The answer to why WBD is now popular is, as ever with Hollywood, the assets. It controls one of the richest pools of intellectual property in global entertainment. This includes HBO’s prestige archive – fans of The Sopranos will remember this nostalgically – and Warner Bros’ century of film production.
Add a global distribution apparatus and a streaming platform with residual brand value, and it becomes clearer why the likes of Comcast (US:CMCSA) and Netflix (US:NFLX) have been taking a good, hard look. Netflix has already been a beneficiary of WBD’s problems after it snapped up the lucrative streaming rights to The Matrix and Ocean’s Eleven franchises when WBD was unable to renew the expiring agreements in 2023.
Fundamentally, the bidding process tells us more about the state of entertainment than it does about WBD. Streaming economics have become brutal, content costs refuse to fall, and even the largest players now realise that a handful of durable franchises may make a big difference to subscriber growth.
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It is still worth revisiting the logic that created WBD. The 2022 merger of WarnerMedia and Discovery was the culmination of a decade in which everyone believed that scale was the only reliable defence against the changing economics of show business.
The result was a sprawling hybrid that attempted to splice prestige drama, superhero franchises, cable television and unscripted reality TV programming into a single ‘strategic’ whole. Warner Bros Pictures and HBO have deep libraries, strong creative reputations and intellectual property that reliably attracts the punters.
Discovery, by contrast, specialised in profitable, if formulaic, volume TV – think kitchen revamps and competitive barbecue shows. The combined business ended up trying to be Netflix, old-school Time Warner and a 1990s cable operator simultaneously, all while carrying around $50bn (£38bn) of debt.
By contrast, a break-up now looks like the only sensible option. HBO could thrive under a technology-led parent such as Apple (US:AAPL), Amazon (US:AMZN) or Alphabet (US:GOOGL). Warner Bros Pictures could operate either as a revitalised standalone studio or as part of a larger group. And the Discovery cable networks, for all their obsolescence, still generate the steady cash flows that appeal to private buyers who enjoy running off legacy assets.
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Successes and failures
Yet corporate history offers ample evidence that break-ups can either liberate businesses or expose their shortcomings. The classic modern success story remains eBay’s (US:EBAY) split from PayPal (US:PYPL) in 2015. Once touted as a model of digital commerce, the separation allowed PayPal’s payments engine to surge ahead, while eBay settled into more modest, predictable growth. Both businesses emerged enhanced from the split.
Another example is Abbott Laboratories (US:ABT) and its 2013 spin-off of AbbVie (US:ABBV). Investors were offered a simple choice: a steady consumer health business, or a higher-risk biopharma arm anchored by arthritis drug Humira. Freed from competing capital demands, both companies flourished. Though still a work-in-progress, even GSK (GSK) deserves plaudits for refusing to settle for mediocre margins by spinning off its consumer health division.
But break-ups can also expose deeper issues. The split of Hewlett-Packard into HP Inc. (US:HPQ) and Hewlett Packard Enterprise (US:HPE) did little to resolve the parent company’s long-standing strategic drift.
WBD sits somewhere between these extremes. It is not a collapsing empire, but nor does it have the clean binary profile of an eBay/PayPal. However, it does embody the broader lesson that the age of indiscriminate scale is over. Consolidation was once seen as a cure-all for the structural ailments across many different industries, but that logic has reversed.
Against an uncertain backdrop, the ‘jack-of-all-trades’ media conglomerate is a strategic relic. If WBD’s sale or break-up proceeds, it will be remembered as a long-overdue correction. The company tried to solve a complex problem with an even more complex corporate structure.
It discovered instead that its most valuable assets deserved better than to be trapped inside a holding company designed for a different era. Investors should welcome the return to clarity. In media, as in most industries, focus usually wins.
