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 worth investing in.

Warner Bros. Discovery shares have fallen about 70% since the merger closed on April 8, 2022. His tenure has been marked by thousands of job cuts, cutting movies and TV series to save on taxes, killing CNN+ a month after it launched, the hiring and firing of CNN CEO Chris Licht, heckling from students chanting “Pay the writers” at a Boston University graduation ceremony during last year’s writers’ strike, and suing the NBA after it decided not to renew media rights to him after nearly 40 years of collaboration.

To make matters worse, Zaslav has long been one of the highest-paid CEOs in the U.S. His compensation is set to increase 26.5% to about $50 million in 2023. Zaslav’s bonus is tied to growing free cash flow and reducing debt, an agenda promoted by media mogul and influential board member John Malone, who has championed Zaslav, first at Discovery and now at Warner Bros. Discovery. The company has a market capitalization of about $17 billion and $37.8 billion in debt.

The company’s shares fell about 9% in trading Thursday after it took a huge $9.1 billion impairment charge on Wednesday due to the decline in the value of its linear cable networks, which still account for more than 100% of the company’s adjusted EBITDA, meaning the rest of its business suffered losses.

Warner Bros. Discovery cited “continued weakness in the U.S. linear advertising market and uncertainty regarding renewals of affiliated and sports broadcast rights, including the NBA” as reasons for the larger impairment charge.

That’s jarring for investors.

One of the reasons Discovery merged with WarnerMedia was that its diverse content would make it a “great partner for advertisers,” something Zaslav said when the deal was first announced in 2021.

The uncertainty surrounding the company’s valuation due to losing NBA broadcasting rights rings hollow given that Zaslav asserted in November 2022 that “we don’t need to have the NBA.”

“This impairment shows that the company clearly overpaid for its linear assets as part of its merger with WarnerMedia. It also raises the question of what the future cash flows of these assets will be following the potential loss of the NBA, given the increasing pressure on the linear ecosystem,” said Robert Fishman, an analyst at research firm MoffettNathanson.

Still, Zaslav delivered a message of confidence during the company’s earnings conference call on Wednesday.

“We’re happy with where we are,” Zaslav said. “We need to look at all options, but our number one priority is to run this company as efficiently as possible.”

While the company has continued to make progress toward adding streaming subscribers (adding 3.6 million in the quarter) and achieving sustainable profitability, declines in linear revenue and related margins continue to outpace growth in its flagship direct-to-consumer service, Max.

Warner Bros. Discovery’s failure to gain momentum over the past two years suggests it could be a prime target for activist investors who could push for Mr. Zaslav’s ouster or at least the sale of assets such as CNN and the gaming division.

The company also owns a number of other valuable businesses, including HBO, Warner Bros. Studios and DC Comics. Lightshed analyst Rich Greenfield has argued that the company should significantly scale back its direct-to-consumer ambitions and focus on licensing its content to other major streamers.

While Zaslav spoke openly about a potential partnership or merger during an earnings conference call on Wednesday, Chief Financial Officer Gunnar Wiedenfels dismissed the possibility of breaking up the company, citing the benefits of “one Warner Bros. Discovery.”

“We see evidence of the benefits of these strategies every day across the business,” Weidenfels said.

There are two obvious hurdles for potential activists. The first is Mr. Malone’s influence on the board: Activist funds may fear targeting a seat on the board if they believe his power would render any proposal moot.

Second, Warner Bros. Discovery is arguably already pursuing the right strategy, given its massive debt load relative to its market value. If Zaslav is also looking for a buyer for Warner Bros. Discovery, an activist pitch for a sale of the company may not have any added effect.

Warner Bros. Discovery generated more than $6 billion in free cash flow last year, buoyed by a sharp decline in content spending due to the writers and actors strike. That figure will fall to about $4 billion this year as Hollywood returns to work, according to MoffettNathanson.

Investors will want to know how losing the NBA will impact free cash flow going forward, assuming the company doesn’t win a package of games in the Warner lawsuit, but it’s possible that Malone and Zaslav’s strategy of focusing on streaming profitability and cost savings could ultimately pay off.

Still, the pressure is clearly growing on Zaslav to prove he can provide value: Looking at its competitors, Disney’s media assets appear to be rebounding after several struggling years. Paramount Global announced its withdrawal and agreed to merge with Skydance Media.

One of the reasons Zaslav fired Licht from CNN last year was because the rhetoric surrounding him had become 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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