Warner Bros. Discovery Stock Jumps, Analysts on Paramount, Other Deals

Warner Bros. shares Discovery (WBD) surged Tuesday, hitting a 52-week high after the entertainment conglomerate said its board had launched “a review of strategic alternatives to maximize shareholder value.” The news came after weeks of discussions around the Hollywood giant, led by CEO David Zaslav and just before Netflix’s third-quarter earnings release.

Netflix shares hit a 52-week high of $20.58 in early trading. As of 1:15 p.m. ET, the stock was up 10.8% at $20.29.

Citing “unsolicited interest” from “multiple” parties, WBD said options include continuing with the planned split and spin-off, a “company-wide transaction” and “separate transactions for its Warner Bros. businesses.” and/or Discovery Global”. Additionally, it mentions the option of “an alternative separation structure that would allow for a merger of Warner Bros.” and a spin-off of Discovery Global for our shareholders.”

The company said there was no timetable for the strategic review. Zaslav said: “It is not surprising that the significant value of our portfolio is increasingly recognized by other market participants. »

TD Cowen analyst Doug Creutz shared in a reaction note: “We view the company’s announcement as a formality, as reports had previously indicated that the company was already in discussions with several parties. »

His take on what’s likely to happen in terms of a transaction: “We continue to believe that a transaction with Paramount Skydance is reasonably likely,” Creutz concluded. “We are more skeptical about the emergence of other, more attractive bidders.”

The analyst has a “hold” rating with a $14 price target on the company’s shares.

Benchmark analyst Matthew Harrigan increased his stock price target on WBD from $18 to $25 following Tuesday’s announcement. “Even with a ~10% price rise this morning, WBD stock has a plausible and sustainable free cash flow return, high single digits or better, after 2025,” he concluded. “The higher valuation of $25 simply reflects the delay of realization until 2026.”

He and his colleague Daniel Kurnos are convinced that David Ellison’s Paramount Skydance can walk away with WBD. “While Larry Ellison may have reservations about supporting a new acquisition of Paramount Skydance’s ‘legacy media’ under his son, Benchmark’s two analysts who follow the respective companies believe this prospective combination offers the best strategic value in tandem with a high likelihood of regulatory approval,” Harrigan wrote. “Apple, Amazon and almost certainly Comcast would likely face ‘transactional’ friction from the current administration, while Netflix co-CEO Greg Peters has expressed disinterest.”

And Harrigan sees benefits in a deal that predates WBD’s split. “A shorter-term deal is likely less costly than a take-home deal post-separation, further reflecting the momentum of Warner Bros. Studios and HBO Max, as well as a possible additional 12-month lag post-separation due to taxes,” he explained.

Bank of America analyst Jessica Reif Ehrlich reiterated her “buy” rating and $24 price target on WBD on Tuesday. “Today’s recognition of several unsolicited parties expressing interest in the company (both the company as a whole and Warner Bros.) should provide a floor for the stock price,” she argued. “We estimated that post-split standalone Warner Bros. would not be an independent entity for an extended period of time. Given WBD’s wealth of high-end intellectual property and robust library, we believe Warner Bros. is an attractive potential acquisition target.”

She also delved a little into potential deal scenarios. “A potential transaction must take into account many considerations, including regulatory concerns, financial risks and tax implications (the previously announced spin-off is a tax-exempt transaction),” Reif Ehrlich emphasized. “Regulatory guidance would depend on the structure of the deal/buyer, with factors including competitive concerns related to the combination of Hollywood studios and cable networks, although age-old challenges in traditional media appear to limit this risk.”

The expert concluded: “In this sense, the composition of a potential offer will be a consideration for WBD shareholders. We still do not know whether there is now a tax risk linked to the previously announced separation due to unsolicited offers which have now been confirmed by the company. Notably, press reports indicate that Netflix and Comcast are potential bidders (which is not clear for the entire company or specific assets) in addition to previously reported interest from Paramount Skydance. “

Earlier this month, Guggenheim analyst Michael Morris raised his price target on WBD stock by $8 and stuck with his “buy” rating. “Investor discussions remain focused on the possibility of a full takeover bid for the company versus the planned business separation in 2026,” he wrote.

And he concluded: “We believe further consolidation is possible and expect investors will continue to view asset values ​​as the primary basis for stock price targets. As such, we are updating our valuation approach to a sum-of-the-parts methodology, which yields a 12-month target of $22 from $14.”

Robert Fishman, an analyst at MoffettNathanson, discussed possible WBD bidders on Tuesday. “First, as we have already acknowledged, a potential Paramount Skydance bid for the entire company makes a lot of strategic sense in having a much stronger intellectual property slate at Warner Bros. and seeking scale with the combined HBO Max and Paramount+ platforms,” he began. “Combining the linear network portfolios would also likely generate significant cost synergies, while unlocking strategic advantages by combining CBS News with CNN and leveraging the long-standing CBS-Turner partnership for the NCAA’s March Madness Final Four, as well as other overlapping sports rights portfolios. »

The expert called Comcast an “obvious” candidate to bid on WBD. “A Comcast bid would start with the strength and potential for cost synergies in combining the two companies’ studios and streaming platforms. There is additional opportunity to monetize Warner Bros. intellectual property with Universal theme parks (think Batman, for example). And, of course, there are also potential cost synergies between Versant and the WBD’s cable network portfolio. On paper, the match is almost perfect. “

Fishman’s fellow telecom analyst Craig Moffett added: “The problem is regulatory. Or, if you prefer, political. Leaving aside any legitimate concerns about further consolidation of, say, the studio business, the real problem here is that Comcast is being heavily disadvantaged by the current administration.”

Fishman also sees a possible private equity firm partnership with Sony as “another avenue” that could open up for WBD, but he attributes “a much lower probability” of an offer from digital and tech giants such as Netflix, Amazon and Apple.

Fishman’s conclusion: “Ultimately, we believe Paramount Skydance remains the most likely company to successfully acquire WBD. »