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Warner Bros. Discovery is considering a wider range of options after receiving interest from third parties.
The plan had been to split into two companies, but now a full acquisition or asset sales are also possibilities.
The company's debt might make an acquisition challenging to pull off.
Shares of media giant Warner Bros. Discovery (NASDAQ: WBD) rose this week after the company announced that it had initiated a review of strategic alternatives in response to unsolicited interest from third-party suitors. The company said that multiple parties have been interested in a full acquisition or a purchase of Warner Bros. The stock was up about 16.9% by early Thursday afternoon, according to data provided by S&P Global Market Intelligence.
Image source: Getty Images.
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Warner Bros. Discovery is planning to separate itself into two companies, one for Warner Bros. and one for Discovery. While that plan is still going forward, the company is now also considering other options.
Warner Bros. Discovery was formed from the merger of Discovery and Warner Media, which was previously owned by AT&T. The company has struggled to make the combination work despite its collection of high-quality assets, including HBO, Warner Bros. film studios, and various television networks. Revenue grew slightly in the second quarter, but net income would have been negative if not for a one-time pre-tax gain on debt extinguishment.
Warner Bros. Discovery has reportedly received acquisition offers from Paramount Skydance, and reports indicate that Netflix and Comcast are interested in some of the company's assets.
While betting on an acquisition could be lucrative, Warner Bros. Discovery has a significant amount of debt that would make a full buyout an expensive affair. At the end of the second quarter, the company had $4.9 billion in cash and $35.6 billion in total debt. With a market capitalization of around $50 billion, it seems unlikely that Warner Bros. Discovery would get a significant premium over its current stock price in a full acquisition.
Selling parts of itself makes more sense, and the company could use the proceeds to reduce its debt. Either way, investors should be careful speculating on what the stock price might do in reaction to potential deals.
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Timothy Green has positions in AT&T. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.
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