Warner Bros. Discovery CEO Zaslav faces pressure to deliver value

Warner Bros. Discovery CEO David Zaslav needs a win. Soon.

Since merging Discovery with WarnerMedia in 2022 and immediately cutting billions of dollars in costs, Zaslav has struggled to convince shareholders that his company is a worthwhile investment.

Warner Bros. Discovery stock has fallen about 70% since April 8, 2022, the day the merger closed. His tenure has been characterized by implementing thousands of layoffs, cutting movies and TV series to achieve tax efficiencies, eliminating CNN+ a month after its launch, hiring and firing CNN CEO Chris Licht, getting booed at Boston University’s graduation by students chanting “pay your writers” during last year’s writers strike, and suing the NBA after the league decided not to renew media rights with his company after nearly 40 years in business together.

Making matters worse, Zaslav has long been one of the highest-paid CEOs in the country. His 2023 compensation rose 26.5% to nearly $50 million. Zaslav’s bonus is tied to increasing free cash flow and reducing debt — a mandate pushed by John Malone, the media mogul and influential board member who has championed Zaslav, first at Discovery and now at Warner Bros. Discovery, which has a market capitalization of about $17 billion and $37.8 billion in debt.

Shares fell about 9% in trading Thursday. The company took a massive $9.1 billion impairment charge on Wednesday due to the write-down of its linear cable networks, which still account for more than 100% of the company's adjusted EBITDA. That means the rest of the company lost money.

Warner Bros. Discovery blamed “continued weakness in the U.S. linear advertising market and uncertainty related to affiliate and sports rights renewals, including the NBA” for the magnitude of the writedown.

This is not music to investors' ears.

Part of the argument for Discovery merging with WarnerMedia was that its diverse content suite would be a “wonderful partner for advertisers,” as Zaslav said when the deal was initially announced in 2021.

Injecting uncertainty into the company's valuation due to the loss of NBA rights also rings hollow, given Zaslav's statement in November 2022 that “we don't have to own the NBA.”

“The downgrade means this company clearly overpaid for linear assets as part of the WarnerMedia merger, and given the increasing pressures on the linear ecosystem, it also raises a question about what the future cash flows from these assets will be after potentially losing the NBA,” said Robert Fishman, an analyst at research firm MoffettNathanson.

However, Zaslav projected a message of confidence during the company's earnings conference call on Wednesday.

“We feel good about the situation we are in,” Zaslav said. “We have to analyze and consider all options, but the number one priority is to run this company as efficiently as possible.”

While the company continues to make progress in adding streaming subscribers (gaining 3.6 million in the quarter) and moving closer to sustained profitability, declines in linear revenue and associated earnings continue to outpace growth at its core direct-to-consumer service, Max.

Warner Bros. Discovery’s failure to gain traction over the past two years suggests it could be a prime target for an activist investor, who could possibly push for Zaslav’s ouster or at least call for the divestment of assets like CNN or the gaming division.

The company also owns other valuable businesses, including HBO, the Warner Bros. studio and DC Comics. LightShed analyst Rich Greenfield has argued that it should drastically scale back its direct-to-consumer sales aspirations and focus on licensing content to other, larger streaming services.

While Zaslav openly discussed pursuing partnerships and mergers during Wednesday's earnings call, CFO Gunnar Wiedenfels dismissed rumors of a potential company split, citing the benefits of “a Warner Bros. Discovery.”

“I see evidence every day from all over the business world of the benefits of these strategies,” Wiedenfels said.

There are two clear obstacles for a potential activist. The first is Malone's influence on the board. An activist fund may feel intimidated and not want to get board seats if it thinks Malone's power is so great that any suggestion will be useless.

The second is that Warner Bros. Discovery is probably already pursuing the right strategy, given the company’s massive debt load compared to its market valuation. If Zaslav is also looking for buyers for Warner Bros. Discovery, an activist proposal to sell the company may not be enough.

Warner Bros. Discovery generated more than $6 billion in free cash flow last year, driven by a dramatic drop in content spending due to strikes by writers and actors. That figure will shrink to about $4 billion this year as Hollywood gets back to work, according to MoffettNathanson.

Investors will likely want to know how the loss of the NBA will affect free cash flow in the coming years, assuming Warner’s lawsuit doesn’t net the company a gaming package. But Malone and Zaslav’s strategy of focusing on streaming profitability and cost cuts may pay off in the long run.

Still, it seems clear that the pressure on Zaslav to prove he can add value is mounting. Looking at his competitors, Disney's media properties appear to be on the up after several years of struggle, and Paramount Global has pulled the tightrope and agreed to a merger with Skydance Media.

Part of the reason Zaslav fired Licht from CNN last year is that the narrative around him became too toxic.

Now Zaslav is in danger of falling into the same trap.

— CNBC's Rohan Goswami contributed to this article.

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