The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Jennifer Saba

NEW YORK, June 5 (Reuters Breakingviews) - David Zaslav’s fleece vest provides limited protection from the chilling effect of his corporate balance sheet. The Warner Bros Discovery WBD.O boss is trying to eject the collapsing traditional TV business, but $34 billion of mostly merger-related net debt complicates the plan. The time to split was yesterday.

WBD, a $24 billion media conglomerate spanning CNN to Looney Tunes, flagged the possibility of a breakup last year when it restructured into two operating divisions: one that houses cable networks such as Discovery and another for its HBO streaming service and Warner Bros. movie studio. The step laid the groundwork to follow a similar path as cable operator Comcast CMCSA.O, where CEO Brian Roberts outlined plans to move some TV assets into a standalone company.

Financial engineering prospects keep getting tougher by the day. S&P Global, alarmed by the relentless decline in broadcasting and its drag on other businesses, downgraded WBD’s credit rating to junk status. The company’s stock price also has plummeted from a peak of about $77 a share in March 2021 to around $10.

Zaslav is confronted with a conundrum. The spinoff cannot be sent packing with too much more debt than equity, which would tempt friction with bondholders. At 5 times estimated 2026 EBITDA of $5.5 billion, according to Visible Alpha, and if general expenses are evenly divided, the TV enterprise would be independently worth $28 billion.

With 60% debt, the same proportion as now, it would be carrying $14 billion. On that basis, WBD’s remaining $20 billion of net borrowing stays with streaming and the studio. Assume that business is valued at half of where Netflix NFLX.O trades, or 16 times next year’s EBITDA, and the assets are worth $56 billion.

On paper at least, the math suggests WBD’s equity would be worth twice as much as today once cleaved in two. And yet in that scenario, the HBO side also gets stuck with debt equivalent to 5 times its $3.5 billion in projected 2026 EBITDA. That amount of leverage – 30% higher than at the parent now – would potentially impede its ability to compete effectively by hamstringing investment in new programs and technology.

These discouraging figures increase the chances of both companies getting frosty receptions from investors. Zaslav may want to warm up to the idea of selling the TV business instead.

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CONTEXT NEWS

Warner Bros Discovery on May 20 suffered a downgrade to its credit rating by S&P Global to BB+, or junk status, because of continued revenue and cash flow declines at traditional TV networks.

WBD, the owner of HBO, has $38 billion of gross debt.

(Editing by Jeffrey Goldfarb; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on SABA/jennifer.saba@thomsonreuters.com))