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Days later, the company announced it was
betting big on growing its trio of streaming services, Disney+,
the sports-focused ESPN+ and adult-focused Hulu. Just two years
later, Disney surpassed streaming pioneer Netflix Inc in total
subscriptions.
Now, after a brief hiatus, Loeb is back and investing $1 billion
in Disney, emboldened by making the right call on streaming.
He wants Disney to spin off ESPN, a move that Loeb argued would
give the sports brand greater flexibility in pursuing
opportunities like sports betting -- a step that Disney already
is exploring.
In addition to ESPN, Loeb told Disney's CEO, Bob Chapek, that
Disney should accelerate the timetable for acquiring Comcast
Corp's minority stake in Hulu, the streaming service Disney
controls.
Loeb's ideas are getting a tepid reception this second time
around from senior entertainment executives and some analysts,
who say these changes would deplete Disney of revenue at a time
the company continues to lose money on streaming.
Disney was reported to have been considering spinning off ESPN
last year before scrapping the idea. The cable sports network's
streaming service, ESPN+, has become a centerpiece of collection
of streaming services Disney sells to consumers.
Chief Executive Chapek credited live sports on TV and ESPN+ for
helping to power Disney's third quarter where operating profit
jumped 50%. ESPN reported a recent surge in viewers drawn to
college football playoffs, NBA playoffs and NHL Stanley Cup
playoffs, though the number of subscribers has fallen to 74
million households, well off from its peak of 100 million in
2011, according to Nielsen.
Chapek assured investors during the recent earnings call that
the company is exploring sports betting, saying, "sports fans
that are under 30 absolutely require this."
Barclays forecasts that Disney's sports networks could generate
as much as $12.4 billion in revenue and $3.9 billion in
operating income this fiscal year.
“What is also not clear to us is what such a move would achieve
strategically," by shedding ESPN, wrote Barclays analyst Kannan
Venkateshwar in a note.
MoffettNathanson analyst Michael Nathanson wrote that a spinoff
would be financially dangerous to Disney, given the importance
of the cash flow it provides the company through cable fees and
advertising.
There is little appetite for a media company whose business with
expensive sport rights deals and revenues tied to the declining
cable television business, Nathanson added, saying Fox Corp is
the closest comparison. The company trades at roughly five times
its enterprise value, versus Disney's 14X multiple.
"There seems to be little interest from investors in a highly
leveraged asset with a majority of cash flow tied to linear
domestic cable networks," Nathanson wrote. "Given the heavy
fixed cost base of ESPN’s sports rights, we would think that the
market’s aversion to this idea would be similar (or worse) to
the reaction of the (Warner Bros Discovery) merger."
Loeb's Hulu proposal met with similar skepticism.
Disney agreed to pay at least $5.8 billion to acquire Comcast's
one-third stake in the streaming service in 2024. It could well
be forced to pay a premium to complete the deal earlier, which
would eat into its cash on hand and do little to change the
market dynamics for Disney's domestic streaming operations,
where growth has slowed.
Former executives questioned why Disney would risk paying a
premium to rush the Hulu deal.
"Focusing on spinning off ESPN and buying in Hulu for a premium
seem to be dusting off an older playbook when the market valued
assets on different metrics rather than acknowledging the newer
important reality of growing sustainable cash flows, in our
view," Nathanson wrote.
(Reporting by Dawn Chmielewski in Los Angeles and Svea
Herbst-Bayliss in Boston; Editing by Peter Henderson and Lisa
Shumaker)
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