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Warner Bros Discovery shares fell 19 per cent on Wednesday for their biggest daily drop since March 2021 after the entertainment group warned investors it was “unlikely” to meet its goals for paying off debt.
The company behind HBO, CNN and the Warner Bros movie studio has been focused on cutting costs and trimming its debt following the $40bn merger of Warner with Discovery last year and against the backdrop of a rising interest rate environment.
That deal gave the newly combined group more heft in a high-stakes battle with Netflix, and consolidated power under chief executive David Zaslav. But it left WBD with a debt pile of $55bn.
Chief financial officer Gunnar Wiedenfels warned on Wednesday that his previous target — achieving a debt-to-adjusted earnings ratio of between 2.5 and 3 times next year — was now “unlikely” because of a tough advertising market and the lingering impact of the Hollywood labour strike.
“It is unlikely from today’s perspective, that we will hit our target leverage range by the end of 2024 without a meaningful recovery of the TV ad market,” said Wiedenfels.
The television ad market had been “disappointing”, while there was a “real risk at this point” that the labour strike, which has halted TV production, will continue to hurt WBD’s finances in 2024, Wiedenfels warned.
“It is becoming increasingly clear now, that, much like 2023, 2024 will have its share of complexity,” he said.
Since the Federal Reserve began raising interest rates in 2022, Wall Street has become sceptical of Hollywood’s growth-orientated streaming revolution and is focused on profits.
Wiedenfels, a former McKinsey consultant from Germany, has built a reputation for his ability to squeeze expenses and generate profit. Under his watch, WBD had managed to pay off $12bn in debt since the deal closed last year, the company said on Wednesday. WBD had $43bn in net debt at the end of September.
WBD earlier this year changed its pay structure, tying Zaslav’s bonus to his success in generating cash and reducing the company’s leverage.
Wiedenfels said the “vast majority” of WBD’s remaining debt had a fixed interest rate, which should “insulate” the company from rising rates.
His warning came as the group reported that its streaming business had turned a profit in the most recent quarter, while the overall company had narrowed its net loss to $417mn from a $2.3bn loss a year ago. WBD’s quarterly revenue was up 2 per cent from a year ago to $10bn.
WBD’s global streaming subscriber base, however, dropped by 700,000 to 95.1mn in the quarter, which Zaslav blamed on a light content slate.
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