While many stocks have come under considerable pressure over the past month, entertainment giant Warner Bros Discovery (NASDAQ:WBD) continues trudging higher. As of the Nov. 24 close, shares are up approximately 8% during the past 30 days.
Warner Bros’ gains have persisted as rumors around a potential acquisition of the firm heat up. Below, we’ll dive into the latest news around this stock and detail what it means going forward.
The last time MarketBeat covered Warner Bros, the firm had just put up its proverbial “for sale” sign. WBD said on Oct. 21 that the company had received multiple unsolicited offers for some or all of the firm. It initiated a review of these offers to “maximize shareholder value.”
At this point, the serious bidders for Warner Bros. include Paramount Skydance (NASDAQ:PSKY), Netflix (NASDAQ:NFLX), and Comcast (NASDAQ:CMCSA). Recent reports indicate that a deal may be finalized sooner rather than later. According to CNBC, Warner Bros. is looking to announce the company’s path forward by the middle or end of December.
All three firms have sent in their first round of non-binding bids. Paramount Skydance is reportedly looking to acquire the entire firm, including WBD’s linear television networks like CNN and TNT Sports.
Meanwhile, Netflix and Comcast are only interested in the company’s film production and streaming assets. Film production includes DC Studios, which holds valuable intellectual property, such as Superman and Batman. Streaming is primarily centered around HBO Max, which is one of the world’s top five players in video streaming with 128 million subscribers as of last quarter.
Among the offers, Paramount’s bid appears to be the most comprehensive and straightforward. Reports emerged that Paramount was planning to offer $71 billion for the firm through a group investment with the sovereign wealth funds of Saudi Arabia, Qatar, and Abu Dhabi.
This price would represent an approximately 25% premium over the stock’s Nov. 24 market capitalization of just under $57 billion and a share price between $28 and $29. However, this report appears to be inaccurate, as Paramount denies these claims.
According to Bloomberg Intelligence analyst Geetha Ranganathan, Paramount’s offer is likely between $25 and $27 per share. An offer price in this range would represent an approximate 9% to 18% premium over WBD’s Nov. 24 closing price. This would still be a solid win for shareholders, who would receive the offer price upon acceptance of a deal. Importantly, Ranganathan also indicated that the sale process could extend beyond WBD’s year-end timeline.
If no buyer meets WBD’s price expectations, the company could opt to split its business into two separate entities: one for film and streaming, and another for its linear TV assets.
This scenario is likely the biggest near-term risk for WBD shares. The current stock price likely already has a significant takeover premium baked in. If no takeover materializes, then the premium could dissipate quickly.
When Warner Bros. first announced that the company would split in June, shares were trading at around $10. Today, they sit around $23. In the event of a split, it’s difficult to predict how shares could behave, but it would not be surprising to see a significant drop. However, it is also possible that this path could create the most value long-term for WBD, making up for any short-term impacts.
The market continues to bid up WBD stock, indicating that hopes of a sale are rising. Wall Street analysts also continue to push up their price targets.
The consensus target on WBD sits just below $22, implying around 4% downside in shares.
However, among targets issued after Oct. 22, the average is just above $25, implying 9% upside to align with statements made by Ranganathan.
It’s difficult to say what will happen next for WBD. Markets could react differently depending on which firm strikes a deal with WBD — or if no deal is reached at all.
Investors should consider this risk and should also evaluate the relative merits of the stock if WBD is not acquired.
