is Warner Brothers Going Broke?
Warner Brothers Discovery (WBD) is facing a challenging financial situation currently. However, not as a result of operating performance, but due to its substantial debt load in a rising interest rate environment.
As of 2023, the company’s debt stood at approximately $45.4 billion, a figure that poses significant challenges for the media giant, particularly given the current economic climate where interest rates are on the upswing.
More details. The Warner brothers: Albert, Jack, Harry and Sam
In 2021, Warner Brothers Discovery faced an interest expense of $630 million on its debt, which was manageable due to the low-interest rate environment at that time. However, with interest rates climbing in 2022, the interest expense soared to $1.7 billion. As a result WBD stock fell from the low $50’s to $12 today. Of course, media found themselves obliterated the last 2 years. With Paramount falling from the low $50’s to $16 today. Paramount nearly traded at $100 during the streaming bubble of early 2021.
Currently, the interest expense sits at just shy of $600 million per quarter. This increase in interest expenses significantly impacts the company’s financial health.
Despite these challenges, CEO David Zaslav deserves recognition for his efforts in growing both revenue and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by significant double digits over the past two years. However, the question remains as to whether this success can keep pace with rising interest rates. And much of the recent bump in EBITDA falls on Barbie the movie’s success. A success Zaslav can not count on in future quarters.
More details. The first logo of Warner Bros. Pictures (1923–1925). Warner Bros. Pictures – https://logos.fandom.com/wiki/Warner_Bros._Pictures
Looking at the company’s debt maturity schedule, approximately $1.8 billion is due in 2024, and $4.5 billion is due in the first half of 2025. These figures are large, but likely manageable for Zaslav. However, will result in massive increases in interest expense. Warner Brothers Discovery has been actively working to reduce its debt, with a target to reduce gross debt to approximately $36.5 billion by the end of 2024, implying a net debt of about $34 billion. This reduction would result in substantial annualized net interest savings. Hopefully, Zaslav can put out a few more great quarters with some impressive repayment amounts slowly taking WBD out of the danger zone.
Of course, in the broader context, the situation of Warner Brothers Discovery must become viewed from a broader vantage point. One against the backdrop of the media industry and market dynamics.
More details. Movie-goers awaiting Don Juan opening at Warners’ Theatre. Irving Browning – U.S. National Archives and Records Administration
The company, with its rich content portfolio and strategic initiatives, still holds significant potential. The possibility of bankruptcy seems to be far less than 50%, as larger industry players might find the company an attractive acquisition, despite its debt burden. The acquisition could be more digestable for giants like Apple or Google, who could potentially absorb their albatross of a debt load.
Could the stock increase from here? Sure!
WBD-Outstanding-Debt-as-of-Sept-30-2023.pdf (q4cdn.com)
