2019 was a year of big wins for Disney (DIS).
Its streaming service Disney+ drew 10 million subscribers in a day after launching. The company completed a $71 billion acquisition for Fox’s entertainment assets, opened two Star Wars theme parks, and released the second-highest-grossing movie in cinematic history, “Avengers: Endgame.”
The wins encapsulated Disney’s strength as an entertainment behemoth that could cross-market its strong IP everywhere from theaters to theme parks and even directly to your home via streaming.
But flash forward nearly four years later, and the merit of having all those assets under one roof is in question. CEO Bob Iger himself has raised the prospect that the company is too big. And some on Wall Street are advocating for a break-up.
The company’s parks business is slowing. Its linear TV division is declining, and so are subscribers to its flagship streaming service Disney+. Not to mention the media giant seems to have lagged competitors at the box office.
“Given the thinking you’ve done 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 drives 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 asset makeup of the company,” Iger said in response. “As I’ve said, we’re looking at strategic options both for ESPN and for the linear networks, obviously addressing all of the challenges that those businesses are facing.”
Amid the declines in linear TV, Iger said last month he’d take an “expansive” look at the entertainment giant’s traditional TV assets, signaling the potential for strategic options that could include a sale.
At the time, Iger admitted the current distribution model is “definitely broken,” explaining Disney’s linear TV assets, which include broadcast network ABC and cable channels FX, Freeform, and National Geographic, “may not be core” to its strategy any longer.
He reiterated that thinking on the earnings call, calling out three businesses that will drive growth and value creation over the next five years: film studios, the parks, and streaming.
Part of that streaming strategy centers on ESPN, which will eventually become a fully over-the-top direct-to-consumer (DTC) platform.
Analysts and media watchers have cautioned the network’s full transition to streaming will be a difficult journey, particularly when it comes to the high costs of sports rights and consumers footing the bill for an additional streaming service versus watching sports as part of the cable bundle.
Selling off the linear networks will also be challenging given the secular declines in linear television networks amid escalating cord-cutting trends. That thinking will be further complicated if ESPN is not included in a potential spin-off.
‘There is no clean break’
Still, a company split would allow Disney to offload its debt, eliminate loss leaders, and provide a clearer direction for its future in a fragmented media landscape.
So, like Nathanson suggested, why not just make a clean break?
“There is no clean break,” Bank of America analyst Jessica Reif Ehrlich told Yahoo Finance, explaining how Disney’s assets feed off one another to power the business, with the studio IP driving the parks while linear networks provide the cash for Disney to funnel further investments into growth areas like streaming.
Along with that, the value of ESPN is heavily tied to ABC due to its massive reach on broadcast, yet ABC is part of the linear business Iger potentially wants to unload.
“I thought it was pretty clear that Disney wants to own the majority of ESPN. How do you do that without also having ABC and the stations? That’s the part where I have a lot of difficulty,” she said.
Instead of separating the businesses, Ehrlich suggested leveraging the brands to create value, citing ESPN’s $2 billion sports betting deal with Penn Entertainment as one example: “There’s a lot of intrinsic value in the IP that they control,” she said.
Yet, Nathanson, who lowered his price target on the stock to $115 per share from $120, argued that value is not fully realized within the current company structure.
“Given that Disney is in the process of exploring all options when it comes to its future mix of assets, we think there is a clear case to be made that under any scenario Disney’s assets are worth materially more than its current enterprise value,” Nathanson wrote in a note to clients following last week’s earnings results.
“Perhaps the easiest way to close that gap would be to create a new company (or “newco”) with Disney’s Parks, Experiences and Products segment combined with Disney+ and the studio IP that fuels these 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 businesses.”
Unlocking value
It’s a strategy that’s been floated for other legacy media giants, like Paramount Global (PARA), which has long been viewed as a potential acquisition target due to its small size relative to competitors, along with its vast array of brands like BET and Showtime, which have both received interest from buyers.
On Wednesday, The Wall Street Journal reported Paramount dropped its plans to sell a majority stake in BET Media Group after concluding a sale wouldn’t result in any meaningful deleveraging of its balance sheet.
Lionsgate has also leaned into this trend by splitting its studio and Starz business, which will take place in the first quarter of 2024.
Steve Beck, founder of consultant firm cg42, explained to Yahoo Finance that this new age of value creation is representative of the streaming-first era.
“When you start to recalibrate for the direct-to-consumer model, which is what we’re starting to see with Disney and others, you recalibrate the business and there’s aspects of that business that you just fundamentally do not need,” he said.
Bank of America’s Reif, though, maintained divesting likely won’t be enough to solve Disney’s myriad of problems although there are arguments that can be made on both sides.
“I’m not in the camp that says that Disney really needs to split up. Having said that, I think all options, and Bob Iger has made this very clear, all options are on the table,” she said.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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