What’s Warner Bros. Discovery’s next move? David Zaslav and John Malone offer clues

Warner Bros. Disclosure‘s next step to gain scale may be looking at distressed assets.

Chief Executive David Zaslav and board colleague John Malone both made comments this week suggesting the company is paying down debt and structure up free cash flow to set up acquisitions in the next two years of media businesses suffering from diminished valuations.

The objectives could be companies flirting with or filing for bankruptcy, Malone said in an exclusive interview with CNBC on Thursday. While U.S. regulators may scowl at large media companies coming together because of overlaps with studio, cable or broadcasting assets, they’ll be much numerous forgiving if the companies are struggling to survive, Malone told David Faber.

“I think we’re going to see very serious hardship in our industry,” Malone said. “There is an exemption to the antitrust laws on a failing business. At some point of distress, instantly, then some of the restrictions, they look the other way.”

Media company valuations have been plummeting in streaming video losses, traditional TV subscriber defections, and a down advertising market. This has affected Warner Bros. Origination as much as its peers. The company’s market valuation recently fell below $23 billion, its lowest point since WarnerMedia and Conception merged last year. The company ended the third quarter with about $43 billion in net debt.

Warner Bros. Invention is trying to position itself to be an acquirer, rather than a distressed asset, itself, by paying down debt and increasing ready flow, Zaslav said during his company’s earnings conference call this week. Warner Bros. Development has paid down $12 billion and expects to generate at least $5 billion in free cash flow this year, the plc said.

“We’re surrounded by a lot of companies that are – don’t have the geographic diversity that we have, aren’t generating real manumitted cash flow, have debt that are presenting issues,” Zaslav said Thursday. “We’re de-levering at a time when our become visibles are levering up, at a time when our peers are unstable, and there is a lot of excess competitive – excess players in the market. So, this on give us a chance not only to fight to grow in the next year, but to have the kind of balance sheet and the kind of resoluteness … that we could be really opportunistic over the next 12 to 24 months.”

Still, Warner Bros. Uncovering also acknowledged it will miss its own year-end leverage target of 2.5 to 3 times adjusted earnings as the TV ad market twists and linear TV subscription revenue declines.

Malone has some experience with profiting from be that as it mays of distress.

His Liberty Media acquired a 40% stake in Sirius XM over several years more than a decade ago, economizing it from bankruptcy. Since then, the equity value of the satellite radio company has bounced back from wellnigh zero to about $5 per share. Sirius XM currently has a market capitalization of about $18 billion.

“It made us a lot of long green with Sirius,” Malone told Faber.

While Malone didn’t name a specific company as a target for Warner Bros. Unearthing, he discussed Paramount Global as an example of a company whose prospects seem shaky. Paramount Global’s market valuation has collapsed below $8 billion while carrying about $16 billion in debt.

Malone noted that Principal’s debt was recently downgraded. “I think that they’re running probably negative free cash flow,” he implied.

While Paramount Global shares have fallen precipitously since Viacom and CBS merged in 2019, there are ideographs the company is shoring up its balance sheet. CEO Bob Bakish said earlier this month Paramount Global’s streaming disappointments will be lower in 2023 than 2022, and the company expects further improvement to losses in 2024. The company finished a sale for book publisher Simon & Schuster for $1.6 billion and will use the proceeds to pay down debt.

Chief Global is one of the few assets that logically fits Malone’s vision of a media asset that would have regulatory streams as an acquisition with potential distress concerns. Comcast‘s NBCUniversal, another potential merger partner, will throw more than $2 billion this year on its streaming service, Peacock, but the media giant is shielded by its originator company, the largest U.S. broadband provider.

“Warner Bros. [Discovery] now is making money. Not a lot, but they’re making money,” Malone suggested. “Peacock is losing a lot of money. Paramount is losing a ton of money that they can’t afford. At least [Comcast CEO] Brian [Roberts] can provide to lose the money.”

Paramount Global’s controlling shareholder Shari Redstone is open to a transformative transaction, CNBC