On Dec. 12, shares of media giant Warner Bros. Discovery (NASDAQ:WBD) rallied over 15%. This immense gain was due to an announcement that the firm will restructure its business, which offers several key potential benefits. Wall Street analysts have raised their price targets on average, but as of the Dec. 19 close, shares have lost all that gain and more.
So, does the recent drop in Warner Bros. stock price signal a buying opportunity? Let's break down the details and potential benefits of the restructuring, and look at how the incoming Trump Administration could affect them.
WBD Restructuring: Dividing its Growth Engine from its Lagging Segment
Warner Bros.'s restructuring will divide the company into two operating divisions. Previously, the company’s three operating segments were Networks, Studios, and Direct-to-Consumer. Now, Studios and Direct-to-Consumer combine into one division called Streaming and Studios. The Networks segment will move forward as Global Linear Networks.
The Streaming and Studios division will encompass the company’s streaming platforms Max and Discovery+. The firm will now manage the Studios operations, which includes film and TV production, in conjunction with streaming. This reflects the company’s desire to align its content production more with streaming and be its main growth driver.
The Global Linear Networks division will maintain control over the company’s traditional TV channels like TNT, CNN, and TBS. Its focus will be on maximizing profitability and generating cash. The long-term plan is unclear right now, but the Global Linear Networks division may become a separate corporate entity. This is what Comcast (NASDAQ:CMCSA) recently did with its cable networks. If this happens, Warner Bros. could have a more streamlined path to sell off the Global Linear Networks division.
The complete separation of these businesses is what investors are really hoping for. It would mean that Warner Bros. Discovery's stock would only report financial performance for the Streaming and Studio’s division. It would also let markets value the growth-focused part of the business more easily, cutting out the noise from the struggling linear TV unit, which is over $40 billion in debt and had to take an impairment charge of over $9 billion in 2024. Due to this, it’s arguable that Warner Bros. isn’t getting enough credit for its streaming services, which have 111 million subscribers.
The New Presidential Administration Could Aid WBD’s Strategy
A key part of this strategy is Warner Bros.' hope that the mergers and acquisitions (M&A) market will be strong under the Trump administration as it looks to sell parts of its business. Bain and Company described M&A activity as “middling” in 2024. However, it has recovered from 2023. Corporate M&A activity, likely the type that Warner Bros. is targeting, increased by 12%. Strategic M&A valuations hit a historically low point and fell greatly behind public market valuations.
PricewaterhouseCoopers' data shows that M&A in the media and entertainment industry has been very weak in Q4 2024. The firm anticipates a “robust” M&A market in 2025, citing changes that the Trump administration is making to the chairs of key regulatory bodies in support of this. Trump nominated Brendan Carr as Federal Communications Commission (FCC) chair and is attempting to remove Federal Trade Commission (FTC) chair Lina Khan—both of these moves signal a “pro-deregulation agenda."
Khan has made a name for herself as one of the staunchest opponents of large-scale consolidations in recent memory. However, she appears to be fighting against the efforts to push her out. Khan hasn’t voluntarily stepped down, unlike most other Biden Administration appointees, and if she doesn’t resign, she could have a strong influence over the agency’s actions for several months or longer.
WBD Shares Show Solid Upside Potential
Seven analyst price targets were updated an average of 18% after the restructuring announcement. However, as of Dec. 19, shares are down 16% from their Dec. 12 closing price. Additionally, the average of these new price targets implies a 27% upside from the Dec. 19 closing price.
This is evidence of some mispricing, indicating an opportunity. Warner Bros. looks poised to be in a better position if it gets rid of its linear TV business. Evidence cited suggests that the chances of this happening will rise in 2025. However, Lina Khan could throw a wrench into the situation for some time.