Does David Zaslav deserve a $51.9 million payday?
With Warner Bros. Discovery facing falling revenue, stalling earnings, and a 60% stock decline in the last three years, shareholders don’t think so.
This week, they resoundingly rejected the proposed pay package for Zaslav, the company’s CEO, which would give him a 4% raise. Nearly 60% of shareholders’ non-binding votes were against this hefty package, which is an unusually high mark. (Zaslav’s stock-heavy compensation package is largely tied to boosting cash flow and paying down debt.)
Although WBD shares have risen about 20% in the past year, they’re still trading below $10. That’s down from the $24 they were worth when this media conglomerate was created in April 2022.
“A CEO has many jobs, but job one is increasing the value of the company,” said media analyst Joe Bonner of Argus Research, who’s neutral on WBD shares. “That demonstrably has not happened under Zaslav, which makes an outsized pay package pretty egregious.”
WBD isn’t alone in having trouble with the transition to streaming. Rival companies with heavy pay-TV exposure have also struggled. Paramount Global’s stock is down 67% since April 2022, and even mighty Disney went through another round of layoffs this week.
But Zaslav has taken heat since he was the architect of the deal that created WBD, which has fallen short of its overarching goals of challenging the likes of Netflix and Disney while growing revenue and paying down debt.
A WBD spokesperson said the board of directors “appreciates the views of all its shareholders and takes the results of the annual advisory vote on executive compensation seriously.”
The spokesperson added that the board’s compensation committee would continue its “regular practice of engaging in constructive dialogue with our shareholders.”
Going the wrong way
Shareholders’ apparent dissatisfaction with Zaslav stems from a few factors.
The media company is unprofitable and shrinking instead of growing. In the first quarter, WBD lost $453 million as revenue fell 10% year over year. However, WBD did generate $2.1 billion in so-called “adjusted EBITDA,” though that profitability metric isn’t widely accepted.
Wall Street’s bull case for WBD revolves around the company growing while paying down debt. Zaslav has succeeded on that second front, as WBD has slashed nearly $20 billion in debt since WarnerMedia and Discovery merged.
Those efforts have been undercut by WBD’s sinking revenue, however. WBD’s debt recently got downgraded to junk status by S&P Global. Instead of issuing a long-awaited upgrade, the credit rating firm said WBD’s steadily falling revenue and cash flow would make its adjusted EBITDA flatline at around $9 billion into 2028.
WBD also made headlines last month for rebranding its streaming service yet again. Its decision to rename Max as HBO Max just two years after doing the inverse signified a strategic retreat.
While branding strategists praised this move as overdue and a boon to the streamer’s credibility, it ultimately undermines the reason for the merger. Zaslav’s thesis was that WarnerMedia’s prestige brands like HBO and Warner Bros. could combine with Discovery fare like “Dr. Pimple Popper” to create a true competitor to Netflix.
Although Max hasn’t come close to Netflix, it has made solid progress by adding 22 million streaming customers in the last year, most of whom came from international expansion.
Time for a spinoff?
Many media analysts now believe it’s time to end the WBD experiment by splitting up its assets.
WBD may have telegraphed this move late last year by dividing its business into two segments: Global Linear Networks and Streaming & Studios. It could carve out its fading pay-TV networks and keep its more value growth businesses, similar to how Comcast spun off its cable business.
“Most investors believe that the split is coming,” UBS media analyst John Hodulik told BI. “They believe that at the end of the day, it will free up value in the studio/streaming” segment.
A split could make WBD’s growth assets, namely its streaming business, more attractive to Wall Street.
“A potential spin of studios and streaming could be the best way to unlock the significant unrecognized value of the company,” Bank of America’s Jessica Reif Ehrlich wrote in a June 2 note. She argued last year that WBD’s structure was “not working.”
Shareholders seem to agree that change is needed. WBD shares are up 19% in the past month, which Hodulik thinks is due to optimism about a potential spinoff.
One change they’re not willing to endorse, however, is another compensation bump for Zaslav.
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