As a seasoned gamer with a keen eye for business shenanigans, I can’t help but feel a sense of déjà vu when I see this Warner Bros. Discovery (WBD) situation unfold. It seems like another case of corporate jargon and fine print obscuring the truth, much like those in-game terms of service agreements that nobody ever reads!
Investors have taken legal action against Warner Bros. Discovery, alleging that the company misrepresented the possible consequences of losing the NBA’s broadcasting rights.
A lawsuit filed in a New York federal court on Monday alleges that WBD incorrectly represented the financial effects of no longer holding rights to regular and playoff games on its TNT network. This lawsuit comes a month after the NBA formally turned down WBD’s offer to match the rights package it had previously negotiated with Amazon. In August, WBD recorded a $9.1 billion charge for goodwill impairment due to the devaluation of its television networks, which was related to their inability to renew their deal with the league. The company’s stock dropped by almost 9% during after-hours trading on the day this information was disclosed.
Since 1988, Turner Broadcasting System (TBS) has been collaborating with the National Basketball Association (NBA), shelling out approximately $1.2 billion each year as per their current deal. However, this year, due to WarnerMedia (WBD) not reaching a new contract within its designated negotiation period, the NBA started talks with multiple potential partners for fresh agreements. In July, it was revealed that the NBA had inked a series of high-profile TV and streaming rights deals with Disney, NBCUniversal, and Amazon.
The lawsuit takes issue with WBD’s failure to disclose that the loss of NBA rights were likely to cause the company to significantly reevaluate its business, reflected in the massive impairment charge. It points to optimistic statements about WBD’s prospects this year from chief executive David Zaslav, who said in a February earnings calls that the company is “now on solid footing with a clear pathway to growth” and is “confident in its ability to drive sustained operating momentum and enhanced shareholder value.” In regard to the state of negotiations with the NBA at the time, he said discussions were “constructive and productive.”
When the analyst pointed out favorable news, WBD’s Chief Financial Officer, Gunnar Wiedenfels, remarked, “It can be quite simple to mismanage investments in sports rights,” according to the lawsuit. He further stated, “That’s not our practice. We are well-informed about the value we attribute and maintain discipline during negotiations.
Investors are challenging the standard language used by WBD about its acquisitions of sports programming licenses for impact analysis last year. The company claimed that these licenses would not significantly affect their business, finances, or operational results, but they seemed to underestimate the potential for impairment costs, as stated in the lawsuit.
In simpler terms, the previous risk disclaimer was a general, one-size-fits-all statement that didn’t specifically address the actual known risks related to WBD’s sports rights negotiations with the NBA, as indicated in the lawsuit.
In May, following the expiration of WBD’s exclusive sports rights negotiation period with the NBA without reaching an agreement, Zaslav highlighted during an earnings call the company’s long-standing partnership with the league and its ability to counter any rival offers. The lawsuit alleges that WBD failed to reveal in their financial statements the heightened risk of incurring billions of dollars in write-downs if they were to forfeit NBA rights.
In August, when I shared WBD’s Q2 earnings, I highlighted conversations around sports rights, such as our negotiation with the NBA, as a significant factor that instigated a thorough review of our business strategy. Essentially, these talks led to an evaluation process, which resulted in a $9.1 billion discrepancy between the reported value for our network segment during the second quarter.
In order to move forward with the court case, it’s necessary for the plaintiffs to demonstrate that the defendants – specifically, Zaslav and Wiedenfels – either intentionally made deceptive statements or acted without proper care regarding the facts they were aware of at the time.
WBD didn’t immediately respond to a request for comment.
In July, WBD filed a lawsuit against the NBA in a New York court because the league rejected their matching offer for one of its media rights packages in the new 11-year deal. As part of a recently reached settlement, “Inside the NBA” will air on ESPN and ABC starting from the next season. However, TNT Sports will still be responsible for producing the show, with the team of Ernie Johnson Jr., Charles Barkley, Kenny Smith, and Shaquille O’Neal expected to stay together.
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2024-11-27 00:54