Wall Street traders are now betting that Warner Bros. Discovery not only will be sold to Netflix, but also easily approved by US and overseas regulators – with so-called “short interest” in the stock recently evaporating, On The Money has learned.
For much of the year, the media giant known as WBD had seen increase in its short interest – or bets that its stock will fall. In fact, WBD has been among the more heavily shorted entertainment stocks, according to an analysis by S3 Partners (Full disclosure S3’s founder and CEO Bob Sloan is my co-host on the “Risk and Return” podcast ).
That’s because WBD was long seen as an also-ran ladened with high levels of debt; cable properties like CNN were losing audience; its studio producing was mediocre films and its streaming service couldn’t even settle on a name.
The sentiment began to change early last year as CEO David Zaslav began to implement his long-term vision for the company. First, he settled on a streaming name that utilized one of his best selling brands, his streaming service HBO Max.
He then made it profitable, and began churning out hits in his Warner studio subsidiary. He slashed debt. Shares recovered from their near penny stock lows, to around $12.
The shorts backed off as a bidding war over his media conglomerate ensued, retreating further when Netflix emerged as the winner over Paramount Skydance. Short interest continued to shrink as both companies said they had regulatory issues under control, S3 data shows.
Now, short interest is just 3% of the so-called float, or outstanding tradable shares, down from 6% in July.
The “shorts” have been steadily covering their positions “to the tune of 30 million shares over the past month,” S3’s Matthew Unterman tells me. That covering comes at the exact time Netflix’s bid for the company beat out Paramount’s offer.
Does that mean this deal is done and the lack of short interest is 100% predicative of this outcome? I’d be careful. The US regulatory gauntlet will be a two-year affair and members of Congress are speaking up against Netflix’s market clout.
Officials in the EU and UK are similarly concerned. If this deal gets held up indefinitely, short interest in WBD will rise again on bets the deal won’t get done, and the people at Paramount, if they’re still interested, won’t be willing to pay up as it’s proposing now.
Savvy traders know this – which is why after we publish this piece, you might see more than a few start increasing their short positions in WBD.
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