Welcome back to Dry Powder. I’m Bill Cohan.

Sure, David Zaslav and Gunnar Wiedenfels have cleverly managed to pay down some $15 billion of Warner Bros. Discovery’s mountainous debt—no small feat, no matter how you slice it. And yet Wall Street analysts have not, obviously, rewarded their efforts. In today’s issue, why Wall Street hates Zaz’s frankencompany, plus some reflections on Buffett’s annual shareholder letter and its curious omission of Paramount Global.

Zaz and his Teutonic axman, C.F.O. Gunnar Wiedenfels, have done a decent job in this regard by getting the debt down to $40 billion. (Makes sense, given that Zaz and Gunnar’s pay is largely tied to their ability to reduce the company’s leverage and move it off the BBB credit cliff.) And yet, the equity markets are still having a cow. Since WBD emerged from the M&A operating theater in April 2022, the stock is off 65 percent. The company’s equity value is around $21 billion and the enterprise value is $60 billion. Back on creation day, WBD’s enterprise value was closer to $120 billion.

Why are investors still so sour on WBD? I think my friend Rich Greenfield, at LightShed Partners, has it figured out, and it all has to do with EBITDA, or in WBD’s parlance, the dreaded “adjusted EBITDA.” Greenfield’s astute point, made in a February 23 note to investors, is that in the midst of all the backslapping about servicing WBD’s debt, management keeps missing the EBITDA guidance it has shared with Wall Street. As Zaz knows, that’s a big mistake. A successful L.B.O. requires at least two things to happen simultaneously: paying down debt and hitting or exceeding EBITDA targets, year after year. Doing both results in the alchemy of L.B.O. riches. If you don’t believe me, give Steve Schwarzman or Henry Kravis or Leon Black or Michael Dell a call. They’ll fill you in. (By the way, Steve, call me.)

As Greenfield recounts, Zaz & Co.’s original EBITDA guidance for 2023 was $14 billion. That number, floated when the deal was first announced in May 2021, was reaffirmed in the fourth quarter of 2021 and in the first quarter of 2022. But all of a sudden, in the second quarter of 2022—WBD’s first as a publicly traded L.B.O.—Zaz and Gunnar lowered expectations for 2023 to $12 billion in “adjusted EBITDA.” Then, in the following quarter, they added some more caveats: “In the more normal advertising environment, we believe that target should be achievable,” Wiedenfels cautioned. “That said, the lack of visibility on advertising globally creates a more challenging path towards achieving our target, given advertising is by far the greatest variable impacting our financial performance for 2023.”

In the fourth quarter of 2022, WBD lowered its expectations for “pro-forma adjusted EBITDA”—another red flag—for 2023 again, to between $11 billion and $11.5 billion. Zaz & Co. reaffirmed the range in the first quarter of 2023 but guided the Street to the lower end of the band in the second quarter of last year. Then, on September 5, 2023, WBD issued an 8K, reducing its 2023 adjusted EBITDA to a range between $10.5 billion and $11 billion—“predominantly” due to the writers and actors strike. During the third-quarter 2023 conference call, when Greenfield asked Gunnar about that guidance, he not only reaffirmed the 2023 (oft-reduced) adjusted EBITDA, but also made clear that he was not intending to reduce the guidance for 2024. “Let me maybe start right there,” Gunnar said, “because I did not intend to guide down EBITDA for next year relative to where we are today.”

When WBD reported its adjusted EBITDA for 2023, of course, the actual number was $10.2 billion, not $14 billion, a 27 percent miss—and even a miss on the re-revised guidance. As for providing guidance for this year, Gunnar demurred. “I’m not in a position this year to give very specific EBITDA [guidance],” he said on last week’s earnings call. When Greenfield appeared on Yahoo TV, on February 23, with the WBD stock in free-fall, he said, “Investors are panicking right now [and are concerned] … that numbers are coming down and the inability to guide is another way of saying, ‘We’re going to be lower than we previously anticipated.’”

Rich is exactly right. Zaz and Gunnar’s mistake was the adjusted EBITDA gimmick. Their second mistake was missing the adjusted EBITDA projections, in a big way, and in a continuously confidence-reducing manner. Yes, the WBD brain trust has paid down $15 billion in debt. But there’s still two strikes against them. One more and they’re probably toast.

Of course, banning the use of EBITDA as a measurement of financial wherewithal is a major-league contrarian position. In stating that Berkshire is “built to last,” Buffett added the thought that the company’s “strength” comes from its “Niagara of diverse earnings delivered after interest costs, taxes and substantial charges for depreciation and amortization.” He prefers talking about Berkshire’s operating earnings, or operating income.

This is utterly refreshing, especially in an era where the smart alecks of finance, like our pals Zaz and Gunnar, don’t make a move these days without talking about adjusted EBITDA, let alone just plain, unadulterated EBITDA. (In WBD’s latest press release about its fourth-quarter 2023, Gunnar cited “adjusted EBITDA” 27 times.) Indeed, many companies, especially the ones that aren’t doing so well, now eagerly present their performance on an adjusted EBITDA basis, to the point where reading the dread phrase in an earnings report can be directly interpreted as a sign of financial trouble. Perhaps not existential financial trouble, but certainly an indication that management is having trouble making the numbers it promised, and thus trying to obfuscate exactly what is really going on.

There is one other compelling, and related, observation about Berkshire, a company in which—full disclosure—I have been a shareholder for more than three decades. As ever, Buffett’s annual letter is chock-full of his homespun Omaha wisdom, as well as a touching tribute to his late business partner, Charlie Munger. But I was struck most this year by what Buffett omitted. Even though Berkshire is (or was) the largest economic shareholder in Paramount Global, there is no mention of the company in the 19-page letter or in the accompanying Berkshire annual report and 10K.

Buffett sold a third of his stake in the company in the fourth quarter of 2023, which in itself is a little odd considering that its controlling shareholder, Shari Redstone, has effectively put the company up for sale, with no fully engaged takers so far (although a lot of hope is being invested in David Ellison). Buffett still owns some 60 million Paramount shares, worth around $700 million these days. That’s obviously not material in any way to Berkshire, a company with some $160 billion of cash and short-term U.S. Treasuries on its balance sheet. So, there is no reason for him to mention it, per se. Nevertheless, Buffett did make a point of mentioning portfolio companies such as Dairy Queen and See’s Candies—both of which Berkshire owns and operates—even though neither is likely worth $700 million. (Buffett bought See’s in 1972 for $25 million; it could be worth more than $700 million these days, but it’s hard to know since Berkshire does not share any detailed financial information about the business.)

I presume Buffett has nothing to say about Paramount because he’s following the old Midwestern adage that if you have nothing nice to say about someone, say nothing at all. I don’t think he wanted to make the investment in the first place—he bought around 93 million shares in the first quarter of 2022 for an average price of around $30 a share, an investment of $2.8 billion—but yielded to his younger investment partners who must have figured that Shari, a regular at Sun Valley, was serious about selling the company this time and that there had to be someone who was interested in a fading (but prestigious) linear TV business, a (quasi-successful) Hollywood studio, and a (fledgling) streaming business. And so Buffett went along.

Alas, Paramount has been a rare miss for the Berkshire portfolio. The Paramount stock trades at around $11 a share these days, down about two-thirds since Buffett bought his stake. In other words, the investment is basically a bust, with little hope of recouping it even if Shari is able to find someone to buy either Paramount or her family’s holding company, NAI, where she houses the controlling voting stake in Paramount. Buffett won’t get back to $30 a share or probably even close. That, to me anyway, explains why he sold a third of his stake and probably is looking to sell the rest, if he can do so without moving the market down further.

Let’s be clear: Even though the overall gain in the Berkshire stock between 1964 and 2023 was almost 4.4 million percent and the annualized return has been close to 20 percent, double the S&P 500 return during the same period, Warren does make mistakes, and he is usually the first to admit them. In his latest letter, he mentions “mistakes” some six times, twice in the context of assessing risk in the insurance industry, where Berkshire is a big player, and twice in his beautiful tribute to Charlie, who Warren wrote would never remind him of his mistakes, after pointing them out.

He then shared his mantra of sorts for successful investing, which is hard to dispute: “Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been—and will be—rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.” I think we can safely say that the investment in Paramount Global was a mistake, but not a serious one. And we don’t need to remind Warren, either.