With Hollywood leaving behind its mergers and acquisition cycles to favor corporate spinoffs of late, Fitch Ratings on Monday weighed in on whether splitting off, say, a RichCo or a PoorCo from RemainCo will produce the promised rewards of better balance sheets and debt reduction for major studios unbundling ailing linear TV assets from studios and streaming businesses.
The ratings firm argued splitting media conglomerates into smaller and less diversified companies, while improving efficiency and possible cost savings, also has downside risks, including reducing cash flow and so the ability to pay down debt.
“Splitting less profitable legacy segments from higher-growth segments could sharpen business focus, drive operational efficiencies, and unlock shareholder value. However, a significant reduction in scale and product line diversification could weaken cash flow risk profile and limit leverage capacity,” the Fitch ratings firm said in a June 16 report.
Take Warner Bros. Discovery, whose debt credit rating Fitch recently downgraded to junk status as the media conglomerate led by CEO David Zaslav moves ahead on splitting off its studios business, to include the Warner Bros. film and TV studios and HBO Max, from a remaining global networks business, including TNT, TBS, CNN, the former Discovery channels, Discovery+ — and a heavy debt load. That global networks business will be led by current WBD CFO Gunnar Wiedenfels.
“In addition to a complex, aggressive debt exchange offer that will likely subordinate existing bondholders, the split would result in two smaller, less diversified entities that are weaker than the existing combined business. Fitch considers RemainCo the weaker entity of the two because it operates in a secularly declining industry,” Fitch said in its analysis of WBD’s studios and HBO business losing the cash flow still generated by cable TV.
The ratings firm was less harsh on Comcast, where NBCUniversal is similarly looking to offload its legacy TV assets into Versant, but with far less debt than WBD’s RemainCo to be led by Gunnar Wiedenfels. “Fitch views the (NBCU) transaction as neutral to slightly positive for Comcast’s business profile as the reduction in scale and diversification is limited,” Fitch argued in the report.
The ratings firm added the Comcast spinoff could be structured “to keep Comcast’s overall leverage profile stable.” Other recent entertainment industry transactions involving splits and lots of moving parts includes Lionsgate unbundling its Starz Entertainment division, and Charter Communications acquiring Cox Communications.
The current spate of asset unbundling among the major studios is a marked departure from earlier vertical integration in Hollywood, which allowed the major studios to potentially boost control over and profitability for content production and distribution.
At least in good times. Now that legacy TV channels – once growth drivers for the studios — are in decline amid cable cord-cutting and cord nevers, the major studios have eyed or pressed ahead with unbundling their legacy linear TV and studio and streaming businesses.
Despite being in secular decline, Fitch expects well-established linear TV assets like Comcast’s Versant and WBD’s RemainCo to continue generating significant cash flow streams. And streaming platforms and film studios will face their own challenges.
“Fitch expects fiscal 2025 to mark a peak in subscriber levels for many direct-to-consumer (DTC) platforms as cost-conscious consumers narrow their choices. To counter this, streamers are likely to expand ad-supported tiers, enforce stricter password-sharing controls, and explore bundling opportunities,” Fitch argued.
And film studios that rely on blockbuster releases are expected to face continuing box office volatility. “The unpredictability of box office performance and the high stakes of content investments can result in wide swings in profitability, making studios inherently riskier,” Fitch wrote in its report.
