Deregulation could unlock media deals for Warner Bros. Discovery, but only if there's interest.

• It's unclear if merger deregulation will jumpstart consolidation among larger media companies.
• Over the past five years, every major media merger has resulted in billions of dollars in losses for shareholders.
• According to Paul, Weiss global chair of M&A Rob Kindler, it's only fair to judge big deals against what would have happened had no consolidation occurred, even if they haven't worked out.

This week, CEO Brian Roberts conveyed to CEO David Zaslav in a clear manner that if Zaslav was looking to sell, Roberts was not interested in purchasing.

Instead of acquiring content companies, we have focused on organic opportunities, such as the NBA, Roberts stated during Comcast's second-quarter earnings conference call.

According to Zaslav, the reason Roberts and other potential buyers of media assets aren't interested is due to the government's actions.

Many legacy media executives have privately said for years what Zaslav publicly stated earlier this month: The current U.S. administration has hindered deal-making, and business leaders are eager for the next U.S. president to facilitate more mergers and acquisitions.

Zaslav stated at the Allen & Co.'s annual Sun Valley conference that all we need is deregulation to allow companies to consolidate and improve.

The lack of interest from Roberts and Zaslav highlights a crucial question that could influence the future of the media and entertainment sector: Are the largest corporations in the industry unable to acquire smaller competitors due to strict regulations, or are they simply disinterested in their assets?

In numerous sale talks, controlling shareholder Shari Redstone interacted with multiple potential buyers before ultimately agreeing to a deal with Skydance Media, a smaller studio that recently acquired a controlling stake in Paramount without purchasing the entire company.

Despite being a promising company, Redstone's movie and TV studio and library received little attention from major media and tech players who could have benefited from it, according to sources. The sale process of Paramount showed that the largest media and technology companies were not interested in acquiring it.

Similarly to other companies like Starz, AMC Networks, and Vice Media, they have also searched for potential buyers with deeper pockets but have not been successful.

According to Rob Kindler, global chair of M&A at Paul, Weiss, there are two possible reasons why larger media and technology companies are not interested.

Kindler stated that either the assets are not desired or the regulatory obstacles are deemed too difficult to overcome.

The media industry will gain more clarity with a push toward deregulation, as technology and the largest entertainment companies may have abandoned significant media assets as acquisition targets due to the governmental red tape surrounding antitrust, national security, and antiquated communications rules.

Or, perhaps, legacy media companies are simply undesirable assets to own.

Deal or no deal

Zaslav's perspective is based on his own experience. He prolonged the existence of his previous company, Discovery Communications, and likely his tenure as a media company leader by merging it with AT&T's WarnerMedia in 2022. If no deal had been made, Discovery would have remained a small-scale content provider with declining cable networks.

The same dynamic is evident with Warner Bros. Discovery, whose shares have dropped 36% in the past year as the company strives to make its flagship streaming service Max profitable worldwide and confronts the possibility of losing NBA media rights after almost 40 years as a partner.

One option for Zaslav to fund expensive content, such as , or , would be to acquire a trillion-dollar valuation company. Alternatively, he could merge Warner Bros. Discovery with a legacy media company, such as , or , or NBCUniversal, if Comcast were to spin off its media assets.

Zaslav's view that deregulation in media would result in more big-money deals is crucial for the survival of legacy media.

According to a source, he believes that consolidation is the only viable option for legacy media companies that aren't Apple, Google, or Amazon.

Politicians who want to save local news and limit the influence of big technology may find his message persuasive. If large corporations invest billions of dollars in the rights to live sports, it is likely that the legacy media industry will gradually fade into obscurity.

The NBA has chosen Amazon as its partner of choice, prompting Warner Bros. Discovery to seek legal action as a final attempt to preserve its position as a platform for live games.

Zaslav declined to comment for this story.

Terrible track record

While big media mergers can maintain industry competitiveness, they have not been profitable for shareholders. In recent years, several large media deals have occurred, resulting in unfavorable outcomes.

In 2018, Zaslav's Discovery completed its acquisition of Scripps Networks Interactive for $14.6 billion. Then, three months later, it closed its deal to acquire Time Warner for $85.4 billion.

In 2022, Discovery-Scripps merged with WarnerMedia, valuing the company at $43 billion.

The company's market capitalization is $20 billion, but it has accumulated $40 billion in debt due to various mergers.

The merger of Viacom and CBS in 2019, valued at $30 billion, has resulted in a market capitalization of approximately $7 billion for the new company.

In 2019, Disney acquired the majority of its assets for $71 billion. However, there is no doubt that the value of these assets has significantly decreased over the past five years. As a result, Disney's market capitalization is now lower than it was when the deal closed.

In 2022, Comcast recorded a $8.6 billion write-down of Sky's value, suggesting that the acquisition may have been overvalued.

Kindler stated that it is only fair to evaluate the mergers' performance against what would have happened to the companies if they remained independent.

Kindler posed the question: "If these deals hadn't been made, what would have happened? That is the real question, as it seems that many of these deals have not been successful."

In recent years, only a few small media and entertainment companies have tried to go it alone, and the results have been disappointing for shareholders. The owner of cable networks such as AMC, IFC, We TV, and Sundance TV has seen their shares drop by about 80% in the last five years. Similarly, the stock of the owner of streaming service Hulu is down more than 35% in the same period.

The has gained 81% over the same time span.

Hazy regulatory environment

Executives are worried that regulators may reject deals that were previously approved, according to Kindler.

""Twenty years ago, people would consult with a banker before making a deal. Now, they always seek legal advice first, as the regulatory implications are the primary concern," said Kindler, former global chair of Morgan Stanley's M&A practice."

The difference between a Republican or Democratic administration in 2024 and beyond regarding mergers and acquisitions is uncertain. While the Department of Justice under former President Donald Trump allowed Disney to acquire Fox with minimal opposition, his administration sued to block AT&T's deal for Time Warner.

The sale of Simon & Schuster to Penguin Random House for $2.2 billion was blocked by a federal judge on antitrust grounds, while Amazon's $8.5 billion deal for MGM was approved.

JD Vance, Trump's vice president nominee, has publicly expressed support for Lina Khan's aggressive approach to limiting corporate power through mergers.

"Vance stated at RemedyFest that Lina Khan is one of the few individuals in the Biden administration who is performing well, and this sets him apart from most of his Republican colleagues. He believes that promoting competition and separating market verticals are crucial to finding a solution to the challenges they face. Antitrust, he thinks, is the most effective way to achieve this."

It is likely that Kamala Harris, the now-de facto Democratic presidential nominee, will face questions about her regulatory views from the business community in the near future.

Even if Zaslav is correct and deal volume is decreasing due to regulatory issues, it is uncertain if anything will change significantly with a new president, according to Kindler.

More bark than bite

Mark Boidman, head of global media at Solomon Partners, stated that Zaslav's belief that regulatory fears have hindered consolidation may be more rooted in fear than in reality.

"Despite the regulatory environment's shift, both small and large-scale transactions continue to occur in the media industry, as Boidman stated."

Despite Khan's FTC's aggressive rhetoric, the number of enforcement actions resulting in merging parties abandoning or restructuring transactions has not increased, according to Boidman. According to 2022 FTC data, only 1.5% of total mergers that year were altered or failed to complete due to regulatory issues, which is below the 2.6% average of the past 10 years.

The number of merger enforcement actions by federal agencies from Sept. 30, 2022 to Sept. 30, 2023 was the lowest in the last 20 years, according to Covington & Burling.

The decline in the volume of media deals completed as measured by dollar value is evident, indicating a slowdown in larger transactions. In 2022, the total media deal volume was $35 billion, significantly lower than the median of $85 billion from the previous seven years, according to Dealogic.

In 2024, only $22 billion in media deals have been announced, suggesting that the current trend is likely to persist.

It may not be the most effective way to evaluate transactions based solely on whether or not they are approved. Legacy media companies may be deterred from attempting transformative transactions due to the lengthy approval process. Skydance Media and Paramount Global predicted that their merger would be approved by September 2025, more than a year after the deal was announced. The extended waiting period puts both the acquirer and seller in a state of uncertainty, making it difficult to plan for the future together.

— CNBC's Lillian Rizzo contributed to this report.