Disney: In the Midst of Reorganization
Monetization of linear assets serving multiple purposes. By Benjamin Tan
Recent rumors of Disney (DIS 0.00%↑) selling a chunk of its linear assets have generated a flurry of new headlines as the 100-year-old company continues reorganizing its cost structure, DTC strategy, and leadership.
From Reuters (September 15, 2023):
Media entrepreneur Byron Allen has made a $10 billion bid to buy Walt Disney's ABC television network and assets including the FX and National Geographic cable channels, a spokesperson for Allen said on Friday.
Since Bob Iger returned as CEO in November 2022, many speculate his next moves. What will he do differently in his second swing at the job? Some journalists even wonder if he will sell Disney to Apple!
Selling Linear to Free up Balance Sheet?
The monetization move is almost inevitable, given Disney’s plan to buy out Hulu this year. Based on the put-call agreement (signed in May 2019) between Disney and NBC Universal, Hulu is valued at a floor of $27.5bn. This implies a potential upfront cash payment of $9bn (minimum) by Disney for the remaining 33% stake unless NBC Universal takes non-cash consideration or accepts some form of deferred payment.
From Reuters (September 6, 2023):
Comcast has moved up the date for the sale or purchase of its remaining stake in Hulu to Disney to Sept. 30 this year, CEO Brian Roberts said on Wednesday…the companies will go through an appraisal process to determine the value of Hulu, and that process appraises “a lot more than Hulu”
Between the potential selling price of ABC and the buyout quantum for Hulu, Disney will not be improving its balance sheet unless it can shift some of its existing $47bn debt along with the ABC assets.
Nevertheless, this asset swap will remove the uncertainty surrounding how Disney will fund the Hulu purchase, when its balance sheet is already laden with acquisition debt from the 21st Century Fox and COVID-19-related borrowings. In addition, Disney promises to resume paying dividends by this year after suspending them since May 2020. The amount will be small relative to its cashflows, but it will welcome dividend-yielding only funds back to its institutional shareholder manifest.
Disney Stock: Been a Wild Ride
Since co-writing “Disney 2.0: Iger to Reclaim the Magic?” on this blog in December 2022, the stock has not moved at all, which frustrates any shareholder. After the initial excitement surrounding Iger’s return faded, markets have focused more on the faults of its DTC pivot—cash burn, subscriber loss, dilution, competition, Hulu overhang—than the strength of its Parks, franchise value, consumer business, and its still-powerful ESPN network.
I believe the sum-of-the-parts valuation in “Disney 2.0: Iger to Reclaim the Magic?” has not aged. Current share price does not appear to ascribe any value to its DTC business, which should pivot to profitability sooner than later.
Disney has been a wild ride for shareholders who have been holding the stock since pre-pandemic days. Share price peaked at almost $200 before making its ways down to the lows last seen during the height of COVID-19.
We shall see how the ABC-Hulu moves pan out in the coming months, as this will be the first real strategic pivot since Iger took back control—more so than the changes to management and cost structures in the last year.
(Author is long DIS 0.00%↑ )
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