The latest Research Reports from Bank of America indicate that Warner Bros. Discovery is attempting to reshape its valuation logic through structural restructuring and strategic adjustments in the face of intensifying competition in streaming and industry consolidation.
According to the Zhitong Finance APP, the latest Research Reports from Bank of America indicate that Warner Bros. Discovery (WBD.US) is attempting to reshape its valuation logic through structural restructuring and strategic adjustments in the face of intensifying competition in streaming and industry consolidation. Based on an analysis of the company's spin-off plan, asset value release paths, and potential catalysts, Bank of America maintains a 'Buy' rating for Warner Bros. Discovery with a Target Price of $14, indicating significant upside potential from the current stock price.
It is reported that on June 9, Warner Bros. announced it would split into two publicly traded companies through a tax-free transaction, namely Streaming & Studios (S&S) and Global Networks (GN). Bank of America has long believed that exploring such strategic options is the optimal path to unlock the value of Warner Bros. that is not fully recognized, and various spin-off transaction scenario analyses show that the split is expected to create substantial equity value relative to the current Market Cap.
Streaming & Studios covers core assets such as Warner Bros. television, movie groups, DC Studios, gaming division, HBO and HBO Max, as well as the television and movie library. Bank of America views it as the 'Imperium Crown jewel' in the media field, as its intellectual property and content library value have been obscured by past heavy debt burdens and challenges in traditional cable television businesses. After the split, this business sector is expected to break free from debt constraints, stimulating growth potential and could be highly attractive to acquirers looking to expand scale.
Global Networks includes assets such as linear entertainment, sports, and news television channels worldwide. Although the market is pessimistic about traditional linear television businesses, Bank of America points out that with the right capital structure and management team, this business still has the potential to create unrecognized equity value at the current valuation levels. Potential strategic options include cash management, integration with other similar linear assets, asset sales, and private equity investments.
Bank of America also provided a detailed valuation analysis of Streaming & Studios and Global Networks in the Research Reports. In one hypothetical scenario, if Global Networks carries a leverage of 4 times, Streaming & Studios will take on approximately $5.614 billion in net debt, corresponding to a net leverage ratio of 1.7 times. Based on this, if Global Networks is valued at 5 times its 2026 EBITDA, and its 20% equity in Streaming & Studios has a value cap of $6 billion, it can be inferred that the implied value for WBD shareholders from Global Networks is $4.61 per share.
For the Streaming & Studios business, if valued at 12 times and 14 times the 2026 EBITDA (representing a greater discount than Netflix and recent transaction valuations), and subtracting the equity value held by Global Networks (capped at $6 billion), the equity value of this business is approximately $32.8 billion, corresponding to an implied value of $13.34 per share. Bank of America further points out that if considering private market or potential acquisition multiples, the asset value of Streaming & Studios could approach a valuation level of nearly 20 times, meaning the implied value per share is around $26.
Regarding the strategic outlook for Streaming & Studios, Bank of America believes that as an independent company, it has a long cycle of sustained growth. The streaming business has achieved profitability, and it is expected that the EBITDA will exceed $1.3 billion in 2025, with a year-on-year growth of over 90%, and growth momentum is expected to continue into 2026 and beyond, mainly due to subscriber growth, international expansion, optimized pricing strategies, and the scaling up of advertising. Despite challenges faced by the studio business in the past 24 months, several growth drivers are anticipated in the future, such as the reboot of DC, the recovery of the gaming business, and improved movie performances, with the company's goal to exceed $3 billion in studio EBITDA.
Moreover, HBO Max, as a streaming platform, with its extensive content library, could become a prime choice for mergers or joint ventures with other streaming companies, helping to reduce user churn and marketing costs while enhancing customer lifetime value. At the same time, given the company’s vast portfolio of high-quality intellectual properties (such as Harry Potter, DC, The Lord of the Rings, Game of Thrones, etc.) and a strong content library, Streaming & Studios is an attractive acquisition target for large media companies or major tech companies looking to expand their film and television operations.
For the traditional linear television business Global Networks, Bank of America believes that at the current valuation level, there are opportunities to create shareholder value if an appropriate capital structure is adopted. Potential strategic options include: integrating linear assets in international markets such as Europe to achieve cost synergies; managing the business to generate cash flow for debt repayment, with the expectation that this business could generate approximately 20% free cash flow yield at a 5x EV/EBITDA valuation and 100% free cash flow conversion rate, thus providing good returns for shareholders while maintaining stable valuation multiples; selling some undervalued assets (such as CNN) to create value and accelerate the deleveraging process; and due to its high leverage, facing long-term challenges but still capable of generating free cash flow, it may also become a target for private equity investment.
Bank of America also emphasized that as Warner Bros.' investments in streaming and studio operations gradually reach maturity, the two independent entities are expected to achieve self-sufficiency in free cash flow. This is crucial for their future development, as investors generally perceive streaming businesses to be more unpredictable and capital-intensive compared to linear assets, while streaming businesses exhibit positive cash flow properties after reaching a certain scale, and the film and television licensing business is also a stable contributor to cash flow.
Finally, Bank of America’s target price for Warner Bros. is based on its expected valuation multiple of approximately 7.4x EV/EBITDA by 2025, slightly higher than peers, reflecting the company’s potential to enhance value through further strategic initiatives. At the same time, the report also points out the downside risks facing the target price, including potential merger and integration issues that exceed expectations, changes in management, inability to expand the DTC asset business leading to slowed subscriber growth and increased churn, a declining advertising market, decreasing viewership for key channels, potential strategic initiatives failing to materialize as expected, and an acceleration in Pay TV subscriber losses.
