And now, the latest on Warner Bros…

On Wall Street, one of the more popular parlor games is to speculate on who might acquire the spun-off divisions of companies that investment bankers helped merge only a few years before. At the moment, for instance, intellectual bets are being placed on what’s going to happen to the two pieces of David Zaslav’s Warner Bros. Discovery when its separation is completed sometime around the middle of next year. Will Warner Bros., Zaz’s streaming and studio business, persist without a partner? Will Discovery Global, Gunnar Wiedenfels’s portfolio of cable networks like CNN and HGTV, make it on its own, or must it be merged into another lonely TV bundle? Interested parties, of course, include the swath of investment bankers hoping to get in on the action.

Will Paramount Skydance’s new owners join in the spin-and-merge fun? Or will the projected rightward shift of CBS News revive the broadcast network’s prospects sufficiently, as David Ellison and Jeff Shell are hoping after onboarding both Bari Weiss (as my partner Dylan Byers has reported) and Kenneth Weinstein, a pro-MAGA Republican, as ombudsman? After all, Larry Ellison’s net worth spiked more than $100 billion today after promising Wall Street extraordinary A.I.-fueled revenue growth for Oracle next year, making him the wealthiest person in the world. That makes his son’s legacy media gamble look a lot smaller in the grand scheme of things—and, presumably, could unlock extra capital for David Ellison to do more deals.

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Of course, bankers have dreams, too. And sometimes Wall Street shares a little insider conjecture along the way, offering us a sense of what might happen, or could happen, or should happen. Steven Cahall, a longtime research analyst at Wells Fargo, recently published a comprehensive report, “The Linear Crystal Ball,” predicting the next moves on the linear TV chessboard. It’s great stuff, and I wanted to share it with you, even if it’s all pretty speculative. (As always, this is not investment advice.)

Cahall pondered a variety of scenarios, but his first and “most logical” combination was also the most obvious: It called for Versant—the collection of Comcast’s soon-to-be-spun-off linear cable assets including MSNBC (rebranding as MSNOW), CNBC, USA Network, Syfy, and E!—to be merged with Gunnar’s Discovery Global. He envisioned it as a stock-for-stock merger creating a linear TV behemoth, one with more heft to negotiate affiliate fees and advertising pricing. The combination would also allow for duplicative costs to be erased. Without a merger, Cahall predicted a slow and steady decline in EBITDA (and relevance) for Discovery Global. “Given the outlooks,” he wrote, “we think a merger between [Discovery Global] and Versant has strong industrial logic to improve scale, and will create significant synergies that improve EBITDA and [free cashflow].”

The combination of the two companies, based on his EBITDA projections, would be 40 percent accretive to shareholder value, Cahall wrote, compared to their stand-alone values, and would “provide scope for deleveraging.” The combined company would have an equity value of between $15 billion and $20 billion, based on $5 billion of pro forma EBITDA. Alas, Cahall was using an anemic 3.5x multiple of EBITDA as the valuation metric—reflective of the fact that AMC Networks has been trading at about 4x EBITDA—and another hard reality: Even after a combination of Versant and Discovery Global, annual EBITDA would still be declining at low double-digits a year.

When I called him up, Cahall reiterated that Discovery Global would have the “higher quality” linear assets—the “healthiest looking horse in the glue factory,” to use Paul Ryan’s recent epigram—while Versant would have the better balance sheet post-spin. That’s another reason Cahall thinks the combination makes a lot of sense: A combined entity would have better ability to pay down the debt that Gunnar will be stuck with after the spinoff of Zaz’s business. Of course, that may be the precise reason that Versant would not be interested in the combination: Its balance sheet will be relatively debt-free after the spin. Why would Versant want that WBD debt hanging around its neck?

To put some meat on these bones, Cahall predicted in his report that Gunnar’s business would generate $3.4 billion of EBITDA in 2027 (declining 43 percent by 2030 to $1.9 billion) and have some $14 billion in net debt. Using the 3.5x EBITDA multiple, he figured the enterprise value would be $11.8 billion, plus the 20 percent stake it will have in Zaz’s streaming and studio business—he figured that’s worth $7.5 billion in 2027—or a total enterprise value of $19.3 billion. Subtracting the $14 billion of debt, Gunnarco would have an equity value of $5.3 billion.

Meanwhile, Cahall hypothesized that Versant would generate $1.8 billion in EBITDA in 2027 (declining 23 percent to $1.4 billion by 2030). Using the 3.5x multiple, he figured that Versant would be worth $6.2 billion, but would also have $1.5 billion in cash and no debt—giving the company an equity value of $7.7 billion in 2027. “It seems logical to us that WBD’s Global Networks and [Comcast’s] Versant will fall into each other’s arms,” Cahall wrote poetically.

A combined Discovery Global and Versant would generate $5.6 billion in EBITDA in 2027, according to Cahall, declining a mere 20 percent by 2030, to $4.5 billion—in large part because he thinks the company will find synergies equal to 13 percent of its pro forma EBITDA. That, along with the 20 percent stake in Zaz’s business, would give the combined company an enterprise value of $27 billion, and an equity value of $15 billion, after subtracting $12 billion in net debt. In Cahall’s scenario, the equity value of the combined companies would grow from $15 billion to $23 billion, a 53 percent increase, despite the falling EBITDA, because of the rapid debt service (down to just $2 billion) and growing value of the 20 percent stake in Zaz’s business (up to $9.7 billion). This prognosis would value all of Zaz’s business at nearly $50 billion, or 40 percent more than all of WBD is valued at now.

But that’s not enough, according to Cahall. To fulfill this dreamy scenario, he explained, the combined Versant/Discovery Global would need more sports rights. The hypothetically combined entity would only have 8.2 percent of U.S. sports rights—an insufficient market share, in his view. “We think it logical that [Discovery Global and Versant], either stand-alone or together, look to add sports to their portfolio,” Cahall wrote. “This would provide de-risking to long-term cashflows, and likely justify a higher valuation.”

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In particular, the combined company, he said, should buy the non–Fox News assets of Fox Corporation from the Murdochs—specifically, the Fox broadcast network and the two Fox sports channels, FS1 and FS2. He pointed to the recent Financial Times report that Rupert Murdoch and John Malone had spoken over the summer about combining WBD and Fox as evidence of a desire for some strategic activity. It’s Lachlan’s decision now, of course, following this week’s resolution of the family’s trust issues.

In any event, Gunnar will have to pay up for the Murdochs to sell these sports assets: $18 billion, or 10x their $1.8 billion in EBITDA, according to Cahall’s math. The sale would leave the Murdochs with Fox News, other assets, and a bunch of cash that he figures will add up to $70 a share, from the current $56 a share.

Needless to say, there are lots of moving parts here. But if Gunnar can pull this off—and Cahall thinks he can, since Gunnar is a cost-cutter who worked at McKinsey and ProSieben once upon a time—then the combined Discovery Global/Versant/Fox Sports would trade at around a 5x EBITDA multiple, instead of 3.5x, given the higher 9x EBITDA multiple he attributed to the Fox Sports assets (post-sale). Cahall projected that this combination would have EBITDA of $8.2 billion by 2030, instead of $5.6 billion, and an enterprise value of $43 billion, instead of $20 billion without the Fox Sports assets. Of course, paying $18 billion in cash for the Fox Sports assets would ratchet the debt of the combined company back up to $30 billion in 2027, but Cahall figures that debt would be reduced in half by 2030.

It’s some beautiful alchemy, for sure, and through the magic of Excel, financial models make these kinds of ideas look not only plausible, but also compelling. But as we all know, an Excel spreadsheet is not the same as the actual thing. Nevertheless, Cahall believes that the institutional investors he talks to will inevitably expect the management teams of both Versant and Discovery Global to contemplate these important strategic questions. “If enough time went by, and you didn’t see action from these companies, I think you’d have to wonder, as an equity holder, why would I want to own them if they’re not taking those steps to improve the outlook for the business?” Cahall told me.

He continued: “Similarly, from a Fox shareholder perspective, would you be willing to sell at a high price if you’re holding the one card that everybody wants? You’re sitting on Park Place in Monopoly, and everybody wants it. What’s your price? And is there any reason not to sell it? So I expect those conversations to hopefully flow from this analysis.”

Cahall says he hasn’t heard anything from Comcast or WBD in reaction to his proposals. Robert Gibbs at WBD did not respond to a request for comment. Both Jennifer Khoury at Comcast and Keith Cocozza at Comcast/Versant declined to comment on Cahall’s speculation. For his part, Mark Lazarus, the C.E.O. of Versant, has said publicly that Versant would be interested in making acquisitions of niche sports rights. In any event, it’ll be fun to watch if any of this happens.

As for the speculation that the Ellisons’ newly recapitalized Paramount Skydance would somehow scoop up Zaz’s renamed Warner Bros., Cahall said that he doesn’t see that happening. PSKY’s equity value these days is some $7.6 billion, and Cahall puts Zaz’s equity value on day one at $37.5 billion—it’s too big of a bite for the Ellisons, he told me, at least at the moment. Unless, of course, Larry wants to write a big $50 billion check for Zaz from his now nearly $400 billion fortune.

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