Warner Bros. Discovery (WBD) is facing a class action lawsuit filed by investors who claim the media conglomerate misled them about the financial impact of losing its NBA broadcasting rights. The lawsuit, filed in a New York federal court, accuses WBD of downplaying the severe effects that the loss of NBA rights would have on its business and stock value.
Allegations of Misleading Statements About NBA Rights Deal
The lawsuit comes in the wake of a significant blow to WBD's television network division. In August, following the NBA’s decision to reject WBD’s offer to match Amazon's rights package, the company was forced to announce a staggering $9.1 billion goodwill impairment charge. This charge reflects the depreciation of WBD's TV networks, directly attributed to the loss of its long-standing partnership with the NBA. The news caused WBD's stock to drop by nearly nine percent in after-hours trading on the day of the announcement.
TNT, which has been a key NBA broadcast partner since 1988, paid an annual average of $1.2 billion under its previous deal with the league. However, in July, the NBA entered into new discussions with several major media companies, ultimately striking deals with Disney, NBCUniversal, and Amazon after WBD failed to renew its contract within the exclusive negotiating window.
Lawsuit Targets WBD’s Optimistic Public Statements
The lawsuit takes aim at WBD’s public statements regarding the company’s financial health and future prospects. In February, WBD CEO David Zaslav had stated that the company was "on solid footing with a clear pathway to growth" and expressed confidence in the company's ability to "drive sustained operating momentum and enhanced shareholder value." He also referred to discussions with the NBA as being "constructive and productive."
During the same earnings call, WBD’s chief financial officer Gunnar Wiedenfels added that "it’s very easy to lose control over sports rights investments," emphasizing that the company had a clear understanding of the value it was assigning to sports rights and would remain disciplined in its negotiations. These statements, the lawsuit argues, were misleading given the eventual fallout with the NBA.
Impairment Charge and Investor Concerns
The investors also criticized WBD for downplaying the risks associated with losing the NBA rights in its financial filings. The lawsuit points out that WBD had stated that its ability to secure sports rights “will not have a material adverse effect on our business, financial condition or results of operations,” despite the fact that the company was aware of the potential for significant impairment charges if it lost the NBA deal.
In May, as the exclusive negotiating window with the NBA expired without a deal, Zaslav had touted WBD’s long-standing partnership with the league and its ability to match competing offers. However, the lawsuit argues that WBD neglected to disclose the full scope of the risk it faced, including the potential for billions of dollars in impairment charges.
WBD’s Impairment Charge Explained
In its second-quarter earnings report in August, Wiedenfels explained that sports rights negotiations, such as the one with the NBA, were a “triggering event” for a reevaluation of WBD’s business. This reevaluation ultimately led to the massive $9.1 billion impairment charge.
The lawsuit suggests that the defendants, including Zaslav and Wiedenfels, knew or should have known that their statements regarding the NBA deal and its potential impact on the company were misleading. To proceed with the lawsuit, investors must prove that the defendants acted recklessly or with knowledge that their statements were false.
WBD's Ongoing Legal Battles
Warner Bros. Discovery is no stranger to legal challenges regarding its sports broadcasting rights. In July, the company sued the NBA after the league rejected its matching offer for one of the new media rights packages. As part of a settlement reached earlier this month, Inside the NBA will move to ESPN and ABC beginning next season, although TNT Sports will continue to produce the show with familiar hosts, including Ernie Johnson Jr., Charles Barkley, Kenny Smith, and Shaquille O'Neal.
WBD has yet to comment on the current lawsuit, and it remains to be seen how the legal and financial consequences of the NBA rights loss will unfold in the coming months.
