BadCo Credit Rating Agency Pours Cold Water on Hollywood Spinoff Ambitions: Is it a Risky Investment?

Fitch Ratings, the credit rating agency, recently shared its two cents on the trend of Hollywood studios favoring spinoffs over mergers and acquisitions. This strategy involves splitting companies like RichCo or PoorCo from their parent company, with promises of better financial health and reduced debt.

While this approach may offer some benefits like increased efficiency and cost savings, Fitch Ratings points out that there are risks involved. By breaking up conglomerates into smaller, less diverse entities, there is a potential to reduce cash flow and limit the ability to pay off debts.

For instance, Warner Bros. Discovery is undergoing a significant restructuring, which includes separating its studios business, encompassing Warner Bros. film and TV studios and HBO Max, from its global networks business, which includes TNT, TBS, CNN, and other channels. This move comes with a heavy debt load and a recent downgrade to junk status by Fitch Ratings. The global networks business will be overseen by current Warner Bros. Discovery CFO Gunnar Wiedenfels.

While restructuring can sharpen focus, improve efficiency, and create value for shareholders, it’s essential to consider the impact on cash flow and leverage capacity. So, while spinoffs may sound promising, they also come with potential downsides that need to be carefully weighed.