Warner Bros. Discovery is projected to shoulder less debt that expected after the merger is completed — good news that Discovery chief David Zaslav trumpeted to investors on Wednesday as he offered a glimpse of the planning under way as the companies strive to close the transaction by the middle of next year.
During Discovery’s third quarter earnings conference call, Zaslav revealed that Kevin Mayer, former Disney executive, has signed on as a consultant to advise on the enlarged company’s direct-to-consumer distribution strategies. Zaslav confirmed what the industry already expected: Discovery chief financial officer Gunnar Wiedenfels will serve in the same role at Warner Bros. Discovery.
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Zaslav enthused about the opportunity ahead for the combined company with its breadth of content and ability to deliver content packages with broad appeal to a range of demographics. Warner Bros. Discovery’s ability to offer entertainment, lifestyle, news and sports content is “what underpins our confidence and enthusiasm in our global go-to-market attack plan.” Moreover, the prospect of starting off on stronger financial basis will help them de-lever the company “even without any assets sales,” he said.
“Weaving in sports, scripted, news and male-oriented programming is a true win-win and will generate significant upside for us,” Zaslav said.
Zaslav reiterated that the spinoff deal unveiled in May that will bring together Discovery with AT&T’s WarnerMedia is “well on track” to close around the middle of next year. Discovery is now projecting that the combined entity will have a debt ratio of 4.5 times annual earnings before interest, taxes, depreciation and amortization, down from a projected 5 times EBITDA. Every fraction of a percentage point will matter for Warner Bros. Discovery over the long-term.
The adjusted forecast was influenced by better visibility for the Discovery team into the capital allocation needs for the WarnerMedia businesses and by Discovery’s own better-than-expected performance so far this year. Wiedenfels noted that Discovery used conservative assumptions in all of its merger planning forecasts. Wiedenfels said about 25% to 30% of the debt adjustment was driven by Discovery’s own momentum and operating results. Wiedenfels and Zaslav also emphasized that the improved post-merger ratio means that the enlarged company will trim down the red ink to the targeted 3 times EBITDA sooner rather than later.
The enlarged company has also vowed to find $3 billion in synergy savings from eliminating redundancies and economies of scale. Zaslav pointed to Discovery’s success with its 2015 acquisition of Scripps Networks Interactive, which brought lifestyle channels including Food Network and HGTV into the fold. The companies found $1 billion in cost savings, more than three times what was projected.
“It already speaks to best practices and the tailwind in place from the integration of Scripps,” Zaslav said. “It’s a great starting point.”
Zaslav was pressed for details on his thoughts about how WarnerMedia and Discovery will integrate operations, specifically for their respective streaming platforms, HBO Max and Discovery Plus. The TV veteran who is about to become CEO of Warner Bros. Discovery declined to go into detail, citing the pending regulatory review. But in his broad-strokes comments, Zaslav couldn’t curb his enthusiasm for the opportunities ahead.
“The combined service will appeal broadly to all demographics,” Zaslav said. “The global addressable market should be on par with the biggest streaming services.”
Disney Plus has set the standard for streaming launches in the U.S. by traditional Hollywood, with 116 million global subscribers as of August since its November 2019 debut. “We think we have a comparable product, maybe even more diversely attractive in entertainment, and on top of that we also have sports,” Zaslav said.
Zaslav stressed that they have not reached the stage of making granular decisions about whether to combine Discovery Plus and HBO Max or other bundling options. But in the main, Zaslav emphasized that Warner Bros. Discovery’s content offering will have four-quadrant appeal, from high-end scripted drama to children’s programming, lifestyle, factual, true crime and documentary fare to an impressive movie library to news and sports.
For one, less than half of Discovery’s domestic subscribers to Discovery Plus are also HBO Max subscribers. “There’s a real opportunity to broaden the base of our combined offering,” Zaslav said. “It’s quite clear the winners in streaming are going to be those companies with the best quality stories, the most appealing content with choice and personalization in a simple product that comes at a great value.”
Zaslav noted that the company has been impressed with the uptake for the “ad-light” version of Discovery Plus that is offered for $5 a month with some advertising built in compared to the $7 monthly price tag for the ad-free version.
Both WarnerMedia and Discovery are going full-throttle on content spending and investment in their respective platforms. Discovery International chief JB Perrette noted that Discovery has started to adjust its international rollout plans for Discovery Plus as it anticipates a future bundled offering. In some cases, Perrette said that means making sure that it has flexibility on the distribution side in the short term.
“We’ve been disciplined and tactical in the further international rollout of Discovery Plus,” he said.
Among other highlights from the 70-minute conference call:
** Zaslav said the integration plan calls for reviewing all of the assets under the Warner Bros. Discovery umbrella for transformation opportunities or sale. “Nothing is sacred and no stone is unturned” in the quest for cost savings and achieving strategic goals. “Three billion is a tangible and achievable goal,” Zaslav said of the synergy savings target.
** Discovery Plus’ fundamentals were strong in the quarter. More consumers are spending more time watching the service. “Churn, particularly in the U.S. continues to look strong and approaching peer group lows. Our app store ratings are firmly at the top. And monetization and engagement continues to exceed our expectations,” Zaslav said.
** Discovery Plus, which bowed Jan. 1, racked up about $200 million in losses for the quarter and should generate about the same loss for Q4, Wiedenfels said.
** Zaslav stressed that neither Discovery nor WarnerMedia are pulling back on content spending even as they prepare to join forces. “We want to keep both of our ecosystems nourished, strong and growing,” he said. “When — and if — we come together, we’ll come together with strength.”
** Mayer, the longtime Disney executive who is now a private investor and chairman of sports streamer DAZN, has come aboard as a DTC consultant, but Mayer remains committed to his existing deals with Blackstone for media acquisitions and with DAZN. “We’re super excited about Kevin coming in and giving us the full scope of his experience and brain on everything he’s seen and learned,” Zaslav said of the executive who led the Disney Plus launch.
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