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Discovery of Warner Bros. (NASDAQ:WBD), the new entertainment giant formed on April 8 from the merger of Discovery Inc. and WarnerMedia, is expected to become the second multimedia player in terms of turnover after waltz disney (NYSE:SAY). Since the merger, WBD stock has fallen faster than stock markets in general, losing more than 30% year-to-date, but rebounding 5% on the day.
Despite the buzz surrounding this mega-deal, WBD stock actually has huge debt to manage and a year of integration to contend with, which will continue to send bearish waves to its shares. So for now, I would avoid this one.
Although the newly formed entity has yet to release combined quarterly performance, due to the freshness of the merger, MarketScreener expects WBD’s net debt to jump 321% in 2022 to a colossal amount. of $45.7 billion. With this massive figure, the company’s leverage ratio is expected to reach 4.15x in 2022, a high level in a rising interest rate environment.
Also, yesterday LV Group confirmed it had agreed to form a joint venture with WBD to create a premium sports offering in return for a £93million payout over the next three years and up to £540million in payouts performance-based. While WBD will secure premium sports content for its platforms, this will further strain its finances and stock market performance.
In terms of content, Warner Bros. Discovery is poised to compete on equal footing with other media giants and is currently valued at cheap multiples, trading at a forward EV/EBITDA of just 7.91x. . In addition, the combined company should generate significant synergies, estimated by management at $3 billion.
Nevertheless, there seems to be more downside than upside in the short term. Indeed, the massive amount of debt of the combined entity, the process of integrating the two entities and the unfavorable market conditions for highly indebted companies should continue to put pressure on WBD stock.
At the date of publication, Cristian Docan did not hold (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
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