“Operational Friction”: Warner Bros Discovery Stock (NASDAQ:WBD) Jumps as Some Worry About the Split’s Impact

Entertainment giant Warner Bros. Discovery (WBD) recently made a move that was, seemingly, inevitable: to take its linear cable content and spin it off from its streaming video content and put the two packages into their own operations. And investors were over the moon about this, and remain so today. Not everyone is so certain this idea will work, though. But shareholders were definitely on board, and sent Warner shares up nearly 4% in Tuesday afternoon’s trading.

Barclays analyst Kannan Venkateshwar, who has nearly a five-star rating on TipRanks, noted that the move may produce “operational friction,” especially given how some of these operations may need to be restructured from the ground up to separate. Venkateshwar pointed out that Max is actually bundled with Warner’s linear content, so separating the linear content from the streaming content would likely require those bundles to be reworked as well.

Moreover, the separation also fails to address the matter of $37 billion in outstanding debt that Warner still carries. Warner is putting the linear stuff into the hands of Chief Financial Officer Gunnar Wiedenfels, who noted that “global networks” would have most of Warner’s debt. The streaming and studios business, meanwhile, would maintain a smaller, “…but not insignificant…” portion therein.

And Then the Bondholders Saw the Bag They Were Holding

One more problem emerged out of the Warner split: bondholders. Three years ago, Warner sold what was one of the biggest “high-grade corporate bonds on record,” reports noted. Now, those who bought in are left with a disastrous choice. Warner is buying back up to 40% of those bonds, thanks to a $17.5 billion bridge loan. But no matter whether holding or selling, the bondholders now have a bigger problem.

Part of the condition of selling, reports note, is the loss of “key safeguards” on other Warner securities they might own. But those who keep the notes to keep those safeguards will find their position in the creditor line pushed back should that become an issue later on. Cooperation pacts, the reports note, will also be tougher to form, meaning that bondholders that actually keep their debt will have fewer protections overall.

Is WBD Stock a Good Buy?

Turning to Wall Street, analysts have a Moderate Buy consensus rating on WBD stock based on nine Buys and eight Holds assigned in the past three months, as indicated by the graphic below. After a 18.53% rally in its share price over the past year, the average WBD price target of $12.43 per share implies 25.3% upside potential.

See more WBD analyst ratings

Disclosure