Sun. May 29th, 2022

CNN is proving a PR hassle for Discovery, the television group about to take over the news network’s parent, Warner Media. In addition to various scandals there may be a financial hit on the horizon. CNN has jumped into the streaming wars with an offering called CNN Plus. The price tag so far is $ 350mn, a figure decided after Discovery agreed to merge with Warner Media last year. That deal valued the combined company at an enterprise value well over $ 100bn.

Much has changed since then. Netflix, the bellwether of streaming entertainment, has seen its subscriber growth slow sharply. Wall Street is rattled. Discovery’s share price has lost a fifth since the deal was announced. The hope was that WarnerMedia would enable Discovery to become a winner in the streaming wars.

But the new company has too much debt. Its net leverage as measured by the net debt-to-ebitda multiple will be a juicy 4.5x times. Meanwhile content companies still must fork out billions of dollars each year for new users while profits remain elusive.

The challenge for the likes of Discovery and WarnerMedia is that both have profitable legacy pay-TV businesses that are not growing. Last year Discovery generated $ 2.42bn in free cash flow even after losing $ 1bn on its own streaming service.

The combined company, which will be called Warner Bros. Discovery, is estimated to have nearly $ 60bn in gross debt. The expectation was that cost cutting, synergies and momentum in subscriber growth would reduce leverage within a couple of years to below 3 times debt to ebitda. Since the deal was struck, however, the content arms race has only accelerated. The top eight media groups are set to spend $ 100bn on new shows in 2022 alone.

Some media watchers believe that Discovery could jettison CNN and focus on the HBO franchise. The group seems unwilling to do that at the moment. But keeping CNN only adds to the deal’s price tag.

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