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Investing.com -- Needham & Company said a potential takeover of Warner Bros. Discovery (WBD) by PSKY “makes sense for both strategic and economic reasons” and believes a deal can clear the threshold price required under WBD CEO David Zaslav’s contract.
In a note to clients, Needham wrote, “We think a deal can get done above $16.80 per WBD share, as per CEO David Zaslav’s employment contract.”
Analysts added that combining the two companies adds both strategic and economic value, estimating “the incremental economics at around $30B, and if 100% of incremental value was given to WBD shareholders, that would imply a $24.30/share price for WBD.”
The firm projected $3 billion to $4.5 billion of cost synergies, translating into $24 billion to $36 billion of value creation.
“There are typically enormous cost synergies when combining 2 studio businesses,” Needham said, citing potential savings from eliminating overlapping corporate, distribution, marketing, and strategy functions, and even shuttering or selling one of the studio lots.
Strategically, Needham argued the merger would address the scale problem both companies face.
“Combining PSKY and WBD would take 2 sub-scale companies and give them both much-needed size,” the analysts said, noting that the pro forma advertising revenue would reach about $18 billion, making the group the fifth-largest advertising-driven company in the U.S.
The analysts also stated: “ If PSKY bids for WBD, it becomes clear that Larry Ellison, co-founder of Oracle, is financially supporting all of his son’s David’s entertainment industry ambitions.”
“This deep-pocket backstop improves credit quality and improves equity holder’s risk/reward profile, which should drive upside to its valuation multiple, we believe,” Needham added.
While other bidders could emerge, Needham concluded that a PSKY bid for the entire WBD business would likely prevail given the breadth of assets involved.