Shareholders are putting pressure on David Zaslav, CEO of Warner Bros. Discovery, to produce results.

• David Zaslav, CEO of Warner Bros. Discovery, is becoming more urgent in securing a victory for shareholders.
• The stock price of Warner Bros. Discovery dropped on Thursday due to a $9.1 billion impairment charge resulting from the decline of its linear business and the uncertainty surrounding NBA rights.
• It is possible that the company may be targeted by activists due to its ongoing efforts to increase value, but it is also possible that outside investors may have limited options for alternative strategies.

Chief Executive Officer David Zaslav needs a win. Soon.

Despite merging with WarnerMedia in 2022 and cutting billions in costs, Zaslav has faced challenges in convincing shareholders that Discovery is a valuable investment.

Since the merger closed on April 8, 2022, Warner Bros. Discovery shares have dropped approximately 70%. During his tenure, the CEO has implemented thousands of layoffs, cut movies and TV series for tax savings, canceled CNN+ a month after its launch, hired and fired CNN CEO Chris Licht, faced criticism from students at Boston University's commencement who chanted "pay your writers" during the writers' strike, and sued the NBA after the league opted not to renew its media rights with the company following nearly 40 years of partnership.

Despite his already high compensation, Zaslav's 2023 compensation increased by 26.5% to nearly $50 million. His bonus is linked to increasing free cash flow and reducing debt, as mandated by John Malone, a media mogul and influential board member who has supported Zaslav since his time at Discovery and now at Warner Bros. Discovery, which has a market capitalization of approximately $17 billion and $37.8 billion in debt.

On Thursday, the stock fell approximately 9% in trading. On Wednesday, the company recorded a $9.1 billion impairment charge due to the decline in value of its linear cable networks, which still contribute more than 100% of the company's adjusted EBITDA. The company attributed the write-down to the "continued softness in the U.S. linear advertising market and uncertainty related to affiliate and sports rights renewals, including the NBA."

That's not music to investors' ears.

The rationale for Discovery's merger with WarnerMedia was that its diverse array of content would be an excellent match for advertisers, as Zaslav stated when the deal was first announced in 2021.

The loss of NBA rights is not enough to significantly impact the company's valuation, as Zaslav previously stated in November 2022 that "we don't have to have the NBA."

According to MoffettNathanson analyst Robert Fishman, the write-down signifies that this company overpaid for the linear assets during the WarnerMedia merger, and given the growing pressures on the linear ecosystem, it raises a question about the future cash flows on these assets after the potential loss of the NBA.

During the company's earnings conference call on Wednesday, Zaslav conveyed a message of self-assurance.

"We are very happy with our current location," Zaslav stated. "We must evaluate all possibilities and take into account all options, but our top priority is to manage this company as efficiently as possible."

Fodder for activists

Despite the company's progress in gaining 3.6 million streaming subscribers and moving towards profitability, the decline in linear revenue and associated earnings remains significant, overshadowing the growth in its flagship direct-to-consumer service, Max.

The company's inability to launch in the past two years makes it a potential target for an activist investor, who could possibly push for Zaslav's removal or demand the divestment of assets such as CNN or the gaming division.

Warner Bros. Discovery owns several valuable businesses, including HBO, Warner Bros. studio, and DC Comics. Analyst Rich Greenfield of LightShed has suggested that the company should reduce its direct-to-consumer ambitions and focus on licensing content to larger streamers.

During the earnings conference call on Wednesday, Zaslav openly discussed the possibility of forming partnerships and mergers, while Wiedenfels dismissed any speculation about breaking up the company, emphasizing the advantages of "one Warner Bros. Discovery."

Wiedenfels stated that he sees evidence of the benefits of those strategies in the business world every day.

An activist may face two obstacles: Malone's control over the board and the possibility of an activist fund avoiding board seats due to Malone's perceived power, rendering any suggestions ineffective.

If Warner Bros. Discovery is already pursuing the correct strategy due to its enormous debt load compared to its market valuation, an activist's pitch to sell the company may not be additive if Zaslav is also looking for buyers.

Last year, Warner Bros. Discovery experienced a significant increase in free cash flow, reaching over $6 billion, due to a sharp decrease in content spending caused by the writers' and actors' strikes. However, this year, the company is expected to see a decline in free cash flow to approximately $4 billion as Hollywood has resumed operations, according to MoffettNathanson.

The potential impact of losing the NBA on free cash flow in future years is a concern for investors, especially given the uncertainty surrounding Warner's lawsuit. However, Malone and Zaslav's focus on streaming profitability and cost-cutting may ultimately lead to financial gains.

The pressure on Zaslav to prove his ability to provide value is intensifying, as Disney's media properties have shown signs of growth after several years of decline, and have decided to merge with Skydance Media.

The toxic narrative around Licht was a major reason why Zaslav fired him from CNN last year.

Now Zaslav in danger of falling into the same trap.

— CNBC's Rohan Goswami contributed to this article.

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