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David Zaslav’s top priority at Warner Bros. Discovery: Get the cash flowing again

David Zaslav

Olivia Michael | CNBC

Just a few months in the past, after a prolonged and sobering assessment of Warner Bros. Discovery‘s enterprise, Chief Government David Zaslav gave his division heads a cutthroat mission.

Fake your models are household companies, Zaslav mentioned. Begin from scratch and prioritize free money movement, he added, in keeping with folks aware of the matter. Then, Zaslav mentioned, come again to me with a brand new strategic plan to your unit.

Zaslav’s directive has led to what will quantity to 1000’s of layoffs on the firm by the center of this month, mentioned the folks, together with substantial strategic adjustments at CNN, the Warner Bros. movie studio and different divisions.

The CEO shaped his plan after he took a tough take a look at the funds of the mixed WarnerMedia-Discovery, a deal that closed in April. Zaslav decided the corporate was a large number. AT&T mismanaged WarnerMedia via neglect and profligate spending, he’d determined, in keeping with folks aware of his discussions. The folks requested to not be recognized as a result of the talks have been non-public.

Warner Bros. Discovery’s complete debt of about $50 billion was tens of billions greater than the corporate’s market capitalization. About $5 billion of that debt is due by the tip of 2024 after paying off $6 billion since the close of the merger. The corporate might push again the maturity on some bonds if essential, however interest rates have risen dramatically, making refinancing a lot costlier.

To pay down debt, any firm wants money — ideally, from operations. However the near-term developments steered Warner Bros. Discovery’s enterprise was getting worse, not higher. The company announced free cash flow for the third quarter was negative $192 million, in comparison with $705 million a yr earlier. Money from working actions was $1.5 billion for the primary 9 months of 2022, down from $1.9 billion a yr earlier.

Together with the rise in charges, Netflix‘s global revenue and subscriber growth had slowed, prompting buyers to bail on peer shares — together with Warner Bros. Discovery, which had spent the previous three years creating streaming companies HBO Max and Discovery+. Furthermore, the promoting market was collapsing as company valuations flagged. Zaslav said last month the advert market has been weaker than at any level through the 2020 pandemic.

Warner Bros. Discovery shares have fallen greater than 50% since WarnerMedia and Discovery closed the deal in April. Its market worth stands at about $26 billion.

Along with job cuts, Zaslav’s directive spurred the elimination of content material throughout the corporate, together with scrapping CNN unique documentaries, Warner Bros. killing off “Batgirl” and “Scoob 2: Holiday Haunt,” and HBO Max eliminating dozens of little-watched TV series and films, including about 200 old episodes of “Sesame Street.”

The speedy choices allowed Zaslav to reap the benefits of tax efficiencies that include adjustments in technique after a merger. Warner Bros. Discovery expects to take up to $2.5 billion in content material impairment and improvement write-offs by 2024. The corporate, which has about 40,000 staff, has booked $2 billion in synergies for 2023. General, Zaslav has promised $3.5 billion in cost cuts to buyers — up from an preliminary promise of $3 billion.

The underlying rationale behind Zaslav’s cost-cutting technique centered on turning Warner Bros. Discovery right into a money movement generator. Not solely would money be wanted to repay debt, however Zaslav’s pitch to buyers can be to view his firm as a shining gentle within the altering leisure world — a legacy media firm that truly makes actual cash.

“You have to be measuring us in free money movement and EBITDA [earnings before interest, taxes, depreciation and amortization],” Zaslav mentioned an investor convention run by RBC Capital Markets final month. “We’re driving without spending a dime money movement.”

Zaslav is attempting to offer Warner Bros. Discovery a head begin on what could also be a yr of downsizing amongst massive media and leisure firms. His technique seems clear: Money technology will coax Wall Road into seeing his firm as an business outperformer. However he’ll must maintain collectively an organization made up of tens of thousands of ex-Time Warner and then ex-WarnerMedia employees who have been through round after round of reorganizations and layoffs.

“It is not going to be in a single day, and there is going to be loads of grumbling since you do not generate $3.5 billion of working synergies with out, you understand, breaking a number of eggs as we speak,” Warner Bros. Discovery board member and media mogul John Malone told CNBC in an interview last month.

Money guidelines all the things

Malone has co-strategized and cheered Zaslav’s effort to focus the corporate on maximizing free money movement, which is outlined as internet earnings plus depreciation and amortization minus capital expenditures.

“Each time I speak to David, the very first thing I say is handle your money,” Malone said last month. “Money technology will in the end be the metric that David’s success or failure will likely be judged on.”

Even earlier than Zaslav gave his directive to all the division heads, the brand new CEO was already eager about the right way to increase money movement. That was a minimum of a part of the motivation to get rid of CNN+ just weeks after it launched, which had a spending finances of about $165 million in 2022 and an eventual $350 million, in keeping with folks aware of the matter.

Warner Bros. Discovery owns streaming companies, linear cable networks, a film studio, a TV manufacturing studio and digital properties. It owns DC Comics, HBO, CNN, Bleacher Report, and oodles of actuality TV programming. It has sports activities rights each internationally and domestically, together with the NBA on TNT.

Zaslav hopes his reconstruction of Warner Bros. Discovery will ship two outcomes. First, it’s going to showcase the corporate as a completely diversified content material machine, that includes high manufacturers and mental property in status TV (HBO), films (Warner Bros.), actuality TV (Discovery), youngsters and superheroes (Looney Tunes, DC), information (CNN) and sports activities (NBA, NCAA March Insanity).

Liberty Media’s John Malone

Michael Kovac | Getty Photos

Second, he desires it to show {that a} trendy media firm that is spending billions on streaming video may also generate billions in money movement. The corporate has estimated 2023 EBITDA will likely be $12 billion. Warner Bros. Discovery will generate greater than $3 billion in free money movement this yr, about $4 billion subsequent yr and near $6 billion in free money movement in 2024, in keeping with firm forecasts.

That will give Zaslav a promoting level to buyers in comparison with different legacy media firms. Disney has generated simply $1 billion of free money movement over the previous 12 months and analysts estimate the corporate may have about $2 billion in 2023. That is regardless of rising Disney+, its flagship streaming service, by 46 million subscribers through the interval and proudly owning a theme park enterprise that generated $28.7 billion in income for the fiscal yr — up 73% from a yr earlier.

The low free money movement relates largely to the cash drain from streaming companies and Disney’s massive investments in theme parks. Over the previous 12 months, Disney had $4.2 billion in working earnings from its media properties, down 42% from a yr in the past. Returning Disney CEO Bob Iger said in a town hall final month he’ll prioritize profitability over streaming development — a change from when he left the publish in 2020. Outgoing boss Bob Chapek put into place a Dec. 8 worth hike for Disney+ and different streaming companies to speed up money movement.

“Discovery was a free money movement machine,” Zaslav said earlier this year of his former firm, which he ran for greater than 15 years earlier than merging it with WarnerMedia. “We have been producing over $3 billion in free money movement for a very long time. Now, we take a look at Warner producing $40 billion of income and virtually no free money movement, with all the nice IP that they’ve.”

Wall Road vs. Sundown Boulevard

When AT&T announced it was merging WarnerMedia with Discovery Communications final yr, Zaslav instantly went on a Hollywood “listening tour,” sensing an opportunity to become the new king of Tinseltown. Many Hollywood energy gamers thought Zaslav would dedicate his first yr as CEO to currying favor with the business given his lack of historical past with scripted TV or films. He even bought producer Bob Evans’ house for $16 million in Beverly Hills, an indication some thought meant he wished to be Hollywood’s subsequent mogul.

A yr later, Zaslav is not the king. In truth, many think about him a villain.

It turned out Zaslav’s high precedence as CEO of a big public firm wasn’t to win over Hollywood. Relatively, it was to persuade buyers his firm might survive and flourish as a relative minnow in opposition to a lot bigger sharks, together with Apple, Amazon, Disney and Netflix, in an leisure world that is rapidly shifting to digital distribution.

Zaslav’s give attention to buyers earlier than Hollywood makes enterprise sense. The corporate should be financially sound earlier than it may make massive investments. However he is taken successful, reputationally, with some within the inventive group.

“HBO Max is broadly acknowledged to be the very best streaming service. And now the execs who purchased it are on the verge of dismantling it, just because they really feel prefer it,” tweeted Adam Conover, the creator and host of “The G Phrase” on Netflix and “Adam Ruins All the pieces” on HBO Max, in August. “Mergers give just some rich folks MASSIVE management over what we watch, with disastrous outcomes.”

One Hollywood insider who met with Zaslav to offer him recommendation earlier than he stepped into the job mentioned the Warner Bros. Discovery CEO has ignored 90% of his recommendation on the right way to handle the enterprise.

Time will inform whether or not Zaslav’s year-one choices have lasting ramifications with a spurned Hollywood group. Critics of Iger at Disney initially said he lacked “creative vision” when he first took over as chief executive practically 20 years in the past.

Zaslav can counter that Warner Bros. Discovery hasn’t decreased content material spending. The corporate spent about $22 billion on programming in 2022. However he is additionally made value consciousness some extent of delight.

“We’ll spend extra on content material — however you are not going to see us are available in and go, ‘Alright, we will spend $5 billion extra,'” Zaslav mentioned in February. “We’ll be measured, we will be sensible and we will watch out.”

The corporate’s content material choices have been primarily based on strategic corrections, reminiscent of eliminating made-for-streaming films and slicing again on youngsters and household programming that do not materially entice new subscribers or maintain current ones, executives decided. Warner Bros. Discovery’s HBO continues to churn out hits, together with “White Lotus,” “Euphoria,” “Home of the Dragon” and “Succession,” beneath the management of Casey Bloys.

V Anderson | WireImage | Getty Photos

‘We do not have to have the NBA’

Maybe Zaslav’s largest dilemma is what to do with the NBA.

Like different media firms, Warner Bros. Discovery rents the rights to hold video games and pays billions to leagues for the privilege. Warner Bros. Discovery at present pays round $1.2 billion per yr to place NBA video games on TNT. In 2014, the final time the league struck a cope with TNT and Disney’s ESPN, carriage rights rose from $930 million to $2.6 billion per year.

Negotiations to resume TNT’s NBA rights will start in earnest subsequent yr. Zaslav has mentioned he has little curiosity in paying an enormous enhance simply to hold video games once more on cable networks — a platform that loses tens of millions of subscribers annually.

“We do not have to have the NBA,” Zaslav said Nov. 15 at an investor convention. “With sport, we’re a renter. That is not nearly as good of a enterprise.”

The issue for Zaslav is preserving legacy pay TV afloat could also be his finest method to maintain money movement coming, and placing NBA video games on TNT could also be his finest likelihood to try this. Within the third quarter, Warner Bros. Discovery’s cable network business had adjusted EBITDA of $2.6 billion on $5.2 billion of income. That is in contrast with a direct-to-consumer enterprise that misplaced $634 million.

If Warner Bros. Discovery goes to pay billions of {dollars} a yr for the NBA, Zaslav desires a deal to be future-focused. He has the luxurious of getting NBA Commissioner Adam Silver’s ear for the subsequent three years as a result of the NBA will likely be on TNT via the tip of the 2024-25 season.

“If we do a deal on the NBA, it’ll look lots totally different,” Zaslav mentioned.

Charles Barkley on Contained in the NBA

Supply: NBA on TNT

Warner Bros. Discovery knows how to produce NBA games and airs a studio show, “Contained in the NBA,” which is broadly considered the very best in skilled sports activities. It is doable Zaslav might strike a cope with one other bidder, reminiscent of Amazon or Apple, which can permit Warner Bros. Discovery to provide their video games whereas giving him a package deal of video games that got here with a lower cost tag.

Ideally, Zaslav wish to do sports activities offers that embrace possession of mental property. This is also appealing to Netflix, The Wall Road Journal reported final month. Buying leagues will get Zaslav out of the rental enterprise. However whereas smaller skilled sports activities leagues, reminiscent of Formulation One and UFC, are owned by media firms (Malone’s Liberty Media and Ari Emanuel’s Endeavor, respectively), it appears unlikely NBA house owners would comply with promote Warner Bros. Discovery a stake within the league.

Silver mentioned final month on the SBJ Dealmakers Convention he was open to rights offers structured in novel methods.

“We’re within the enviable place proper now of letting {the marketplace} work its magic a bit bit, you understand, to see the place the very best concepts are going to come back from, what is going on to drive the very best worth,” Silver mentioned.

It is also doable Zaslav might stroll away from the NBA fully. Whereas “Contained in the NBA” co-host Charles Barkley not too long ago signed a 10-year contract to stick with Warner Bros. Discovery, it includes an out clause if Zaslav doesn’t re-up the NBA, in keeping with The New York Submit.

Reside sports activities aren’t essentially important to most streaming companies’ success. Netflix, Disney+ and HBO Max all have zero reside sports activities — a minimum of for now.

The one certainty is Zaslav’s choice will likely be squarely primarily based on how a deal impacts the corporate’s free money movement.

“It is how a lot will we make on the game?” Zaslav mentioned. “After I was at NBC, after we misplaced soccer [in 1998], we misplaced the promotion of the NFL, which was an enormous subject. Then you will have the general asset worth with out the game. So it’s a must to consider all that.”

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