BadCo? Credit Rating Agency Pours Cold Water on Hollywood Spinoff Ambitions

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Recently, Hollywood has been opting for corporate spin-offs instead of mergers and acquisitions. Fitch Ratings recently discussed whether separating a RichCo or PoorCo from RemainCo could bring the expected benefits such as improved financial statements and debt reduction for studios that are divesting their struggling linear TV assets from their studio and streaming divisions.

The ratings agency posits that breaking up large, multifaceted media corporations into smaller, less varied entities could potentially enhance efficiency and lower costs. However, it’s crucial to consider potential drawbacks such as a decrease in cash flow, which may impact the capacity to repay debts.

Dividing less profitable traditional sections from rapidly expanding segments may help improve business focus, increase operational efficiency, and unveil shareholder value, but this move might also decrease overall size and narrow product variety, which could potentially worsen cash flow risk and reduce borrowing capacity, as indicated by Fitch ratings in their June 16 report.

Warner Bros. Discovery, currently headed by CEO David Zaslav, has had its credit rating downgraded to ‘junk’ status by Fitch Ratings. This is due to the company’s plan to separate its studios business, which encompasses Warner Bros. film and TV studios as well as HBO Max, from a larger global networks business. The latter will consist of channels like TNT, TBS, CNN, the former Discovery channels, Discovery+, and will carry a significant debt burden. The leadership of this global networks division is set to be taken over by current WBD CFO Gunnar Wiedenfels.

Besides proposing a difficult, assertive debt swap that might lower the status of current bondholders, the division would lead to two smaller, less varied companies that are less robust than the current combined enterprise. Fitch views RemainCo as the weaker of the two due to it being in an industry that’s experiencing long-term decline, according to their analysis of WBD’s studios and HBO losing the income still generated by cable TV.

The ratings agency, in its assessment, showed a more lenient stance towards Comcast, as NBCUniversal plans to transfer old TV assets to Versant with significantly less debt compared to WBD’s RemainCo, which will be headed by Gunnar Wiedenfels. According to Fitch, this transaction is expected to have a neutral to slightly positive impact on Comcast’s business standing, as the scale reduction and diversification are minimal, as stated in their report.

The rating agency suggested that the structure of the Comcast spinoff might be designed to maintain a steady level of debt across all of Comcast’s operations. Notable examples in the entertainment industry of similar transactions involving divisions being split up and complex dealings include Lionsgate detaching its Starz Entertainment division, and Charter Communications purchasing Cox Communications.

A significant shift towards separating assets by the leading studios nowadays contrasts with the previous structure of studio vertical integration in Hollywood. This setup granted the major studios a potential advantage in terms of controlling and maximizing profits related to content creation and distribution.

In prosperous periods, traditional TV networks – which used to fuel the expansion of studios – have been experiencing a downturn due to people canceling their cable subscriptions (cord-cutting) and those who’ve never had one (cord nevers). Consequently, major studios have either explored or actively pursued separating their traditional linear TV and studio operations from their streaming services.

Even though traditional TV businesses are experiencing a gradual decrease in relevance, Fitch anticipates that robust cash flow generations will persist for established linear TV entities such as Comcast’s Versant and WBD’s RemainCo. Meanwhile, streaming platforms and movie studios will encounter their own set of difficulties.

According to Fitch, it’s predicted that the year 2025 might see a high point in subscribers for numerous direct-to-consumer (DTC) platforms due to budget-conscious consumers limiting their choices. To tackle this trend, streaming services may broaden ad-supported plans, tighten password-sharing restrictions, and investigate possibilities of bundling offers. This is the stance Fitch takes.

Film studios heavily dependent on blockbuster movies are likely to encounter ongoing fluctuations at the box office. In a report, Fitch noted that the unforeseeable nature of box office earnings and the significant costs associated with content production can lead to significant shifts in profitability, thereby making these studios inherently risky.

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2025-06-16 23:24