2019 was a year of big wins for Disney (DIS).
The Disney+ streaming service attracted 10 million subscribers within a day of its launch. The company completed a $71 billion acquisition of Fox’s entertainment assets, opened two Star Wars theme parks, and released the second-highest-grossing movie in movie history, “Avengers: Endgame.”
The wins epitomized Disney’s strength as an entertainment giant that could market its strong IP everywhere from theaters to theme parks and even streaming straight to your home.
But flash forward nearly four years later, and the merit of having all those assets under one roof is up for debate. CEO Bob Iger himself has raised the prospect that the company is too big. And some on Wall Street are calling for a breakup.
The company’s park operations are slowing down. The linear TV division is declining, as is the number of subscribers to its flagship streaming service Disney+. Not to mention that the media giant seems to have lagged the competition at the box office.
“Given the thinking you’ve been doing about the future of Disney, why doesn’t it make sense to create two Disney companies: one focused on parks, Disney+ and then the studio IP that powers that flywheel, and then one on everything else? So why not make a clean break?” MoffettNathanson analyst Michael Nathanson pressed CEO Bob Iger on the earnings call last week.
Nathanson later clarified that “everything else” would include Disney’s linear networks, ESPN+, Hulu SVOD, Hulu Live TV, and Disney+ Hotstar.
“I’m not going to comment on the future structure of the company or the composition of the company’s assets,” Iger said in response. “As I said, we are looking at strategic options for both ESPN and the Linear Networks, obviously addressing any challenges these companies face.”
Amid the downturn in linear TV, Iger said last month he would take an “extensive” look at the entertainment giant’s traditional TV assets, signaling the potential for strategic options, including a sale.
At the time, Iger admitted that the current distribution model is “absolutely broken,” explaining that Disney’s linear TV assets, which include broadcast network ABC and cable channels FX, Freeform and National Geographic, “may no longer be at the core” of its strategy.
He echoed that thinking on the earnings call, naming three companies that will drive growth and value creation over the next five years: movie studios, the parks, and streaming.
Part of that streaming strategy revolves around ESPN, which will eventually become a completely over-the-top direct-to-consumer (DTC) platform.
Analysts and media watchers have warned that the network’s full transition to streaming will be a difficult journey, especially when it comes to the high cost of sports rights and consumers footing the bill for an additional streaming service versus watching sports as part of the cable bundle. .
Selling the linear networks will also be challenging given the secular decline of linear television networks amid escalating trends in cable cutting. That thinking gets even more complicated if ESPN isn’t included in a possible spinoff.
‘There is no clean break’
Still, a business split would allow Disney to pay off its debts, eliminate loss leaders and provide clearer direction for its future in a fragmented media landscape.
So, as Nathanson suggested, why not just do a clean break?
“There’s no clean break,” Bank of America analyst Jessica Reif Ehrlich told Yahoo Finance, explaining how Disney’s assets feed off each other to power the company, with studio IP driving the parks, while linear networks provide Disney with the money to funnel further investments into growth areas such as streaming.
In addition, ESPN’s value is strongly tied to ABC due to its huge reach on broadcast, but ABC is part of the linear business that Iger may want to offload.
“I thought it was pretty obvious that Disney wants to own the majority of ESPN. How do you do that without also owning ABC and the stations? That’s the part I’m having a hard time with,” she said.
Rather than separate the companies, Ehrlich suggested using the brands to create value, citing ESPN’s $2 billion sports betting deal with Penn Entertainment as an example: “There’s a lot of intrinsic value in the IP they control “, she said.
Still, Nathanson, who lowered his price target for the stock from $120 to $115 per share, argued that the value is not fully realized within the current company structure.
“As Disney is exploring all options when it comes to its future mix of assets, we think there is a clear case that under any scenario, Disney’s assets are worth significantly more than its current enterprise value,” said Nathanson. wrote in a note to clients following last week’s earnings results.
“Perhaps the easiest way to close that gap is to create a new company (or “newco”) with the Disney’s Parks, Experiences and Products segment combined with Disney+ and the studio IP that powers those flywheels. This asset would likely trade at a premium valuation given the high moat, iconic assets and strong revenue growth,” he continued, adding, “We have no illusions that the market will be generous in the valuation of these companies.”
It’s a strategy that has been floated for other longtime media giants, such as Paramount Global (PARA), which has long been seen as a potential acquisition target due to its small size compared to competitors, along with its vast array of brands such as BET and Showtime, both of which have interest. received from buyers.
On Wednesday, The Wall Street Journal reported that Paramount abandoned plans to sell a controlling stake in BET Media Group after closing a sale would not significantly deleverage its balance sheet.
Lionsgate is also responding to this trend by splitting its studio and Starz operations, which will take place in the first quarter of 2024.
Steve Beck, founder of consulting firm cg42, explained to Yahoo Finance that this new era of value creation is representative of the streaming-first era.
“When you start recalibrating for the direct-to-consumer model, which we’re starting to see with Disney and others, you’re recalibrating the business and there are aspects of that business that you just fundamentally don’t need,” he said. .
However, Bank of America’s Reif continued to insist that divestment probably won’t be enough to solve Disney’s myriad problems, though arguments can be made on both sides.
“I’m not in the camp that says Disney really needs to break up. That said, I think all options, and Bob Iger has made this very clear, all options are on the table,” she said.
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