3. Warner Bros. Discovery, Inc. (NASDAQ:WBD)
Number of Hedge Fund Holders: 76
Scion Asset Management’s Stake Value: $18.72 million
Scion Asset Management’s 13F Portfolio: 9.29%
Warner Bros. Discovery, Inc. (NASDAQ:WBD) shares represented 9.29% of Michael Burry’s portfolio for the first quarter of 2022, with a stake worth $18.7 million. The firm was formed after AT&T Inc. (NYSE:T) spun off its Warner Bros segment and merged it with Discovery (DISCA) in April 2022.
Cowen analyst Doug Creutz on May 12 gave Warner Bros. Discovery, Inc. (NASDAQ:WBD) an upgraded rating of ‘Outperform’ from ‘Market Perform’, and revised the price target to $24 from $31. He is cautious on the highly competitive streaming space, and sees the firm’s decision not to spend big amid the ongoing consumer wars as a more sustainable strategy than its peers.
76 hedge funds were bullish on Warner Bros. Discovery, Inc. (NASDAQ:WBD) shares at the end of Q4 2021. The largest shareholder of the firm during the first quarter was Laurion Capital Management, which held a stake consisting of 13.58 million shares valued at $338.4 million.
Silver Ring Value Partners, an investment firm, talked about Warner Bros. Discovery, Inc. (NASDAQ:WBD) in its Q1 2022 investor letter, stating:
“Discovery completed the acquisition of the Warner Media business from AT&T in April, and the combined business is now named Warner Brothers Discovery. We are currently in the middle of an interesting technical event, following the spin-off special situation playbook.
The acquisition was structured as a spin-off of Warner Media, with AT&T shareholders receiving ~ 70% of the shares in the combined entity, or ~ 1.7B shares. Many of these shareholders owned AT&T for its phone business and its dividend. It appears that there has been elevated noneconomic selling as these shareholders exit regardless of price. On the other side, few if any investors want to buy the WBD shares prior to this forced selling being over.
This has caused the stock to decline substantially despite being already priced at a low valuation and reporting good recent results. The people selling aren’t likely considering either of those factors, which is what creates the opportunity. One wrinkle as compared to the usual spin-off special situation setup is that the non-economic selling is likely to last for some time given the retail nature of the shareholder base. This is different from the typical pattern where there is a quick sharp sell-off as institutional investors dump their shares quickly following the spin.
In anticipation of this situation, I had sold our equity prior to the major declines, and replaced it with January 2024 call options. I have since been using a portion of the cash generated from the equity sale to add to the option position as the stock price declines. While this does give up some time horizon, which I am usually loathe to do, both the technical selling and the question of the success of the merger integration are likely to be resolved well before then.
If I am correct and this is a much more valuable business than the market is giving it credit for, we will make a hefty profit. If I am wrong, and the combination of financial leverage, merger integration problems and secular risks are more serious than I foresee, we will have a moderate loss. I like our odds and the asymmetry of risk vs. reward.”
