Activist investors call on Disney to part ways with ESPN

Last week, The Walt Disney Co. wowed Wall Street with strong third-quarter results and strong subscriber growth for Disney+. But activist investor Daniel Loeb argues that Disney could do better.

In a letter to Disney Chief Executive Bob Chapek, New York-based Loeb revealed on Monday that his hedge fund, Third Point LLC, had purchased a “significant stake” in the Burbank-based entertainment giant.

In the four-page letter, Loeb outlined a series of proposed initiatives Disney could take to increase shareholder value. These ideas include merging Hulu with Disney+ and splitting ESPN.

“We were especially pleased to see the strength of DTC subscriber growth, the key driver of Disney’s long-term transformation toward less volatile and ultimately higher margin cash flow with better return on invested capital,” Loeb wrote. “We expect to see the quality of Disney’s financial results improve as the business evolves.”

Loeb recommended Disney embark on a cost-cutting program that would include the “disposal of underperforming surplus assets.” He also encouraged Disney to suspend reinstatement of its shareholder dividend and instead use the money to pay down debt, repurchase stock and invest in the business. He also called for a “refresh” of the company’s board to include more people with experience in technology, advertising and consumer engagement.

“We welcome the views of all of our investors,” Disney said in a written statement. “Under Bob Chapek’s leadership, the company delivered this strong performance while navigating the COVID-19 pandemic and its aftermath, including record streaming subscriptions and the reopening of our parks, where we saw strong revenue and profit growth in our national parks. Company.

“Our independent and experienced Board of Directors has considerable expertise in branded, consumer-facing and technology businesses, as well as talent-driven businesses. The council has also benefited from continuous refreshment with an average duration of four years.

Loeb previously lobbied Disney management in an October 2020 letter in which he called on the company to cancel its annual dividend and double its budget to produce and acquire content for its streaming services. Disney ultimately suspended its dividend to focus on bolstering its direct-to-consumer business.

Loeb’s new letter suggests that Disney should consider buying out Comcast’s 33% stake in Hulu before it is required to do so in the 2024 market,” Loeb said.

The merger of the two services could increase the reach of Disney+ in the United States by expanding the types of programming provided by Disney+. Disney+’s content strategy has already expanded, with the addition of shows like the next season of “Dancing With the Stars” to live alongside Disney+’s Marvel, Star Wars, Pixar and kid-friendly shows. .

But buying Comcast’s stake would be expensive. In 2019, Disney struck a deal with Comcast to buy the remaining third of the streaming service for a minimum value of $27.5 billion in early 2024, meaning Disney would lose at least $9 billion. Loeb suggested that Disney should consider paying a premium to gain full ownership of Hulu sooner than expected.

Disney+ added 14.4 million subscribers in its fiscal third quarter, bringing its worldwide total to 152.1 million. The vast majority of these new subscribers were international. Only 100,000 of new Disney+ subscribers came from the United States and Canada. Nevertheless, Disney+ is increasing its monthly subscription fee to $11, an increase of $3, in December. Customers who want to continue paying $8 a month for Disney+ can use a tier that displays ads.

In his boldest proposal, Loeb said Disney should spin off sports cable network ESPN, a move he said would help reduce Disney’s debt and allow ESPN to more aggressively engage in such activities. than sports betting.

While traditional television networks struggle with long-term issues such as cord cutting, ESPN remains a profitable business for Disney. The brand is also part of Disney’s broader streaming offering. ESPN+ is Disney’s sports-focused streaming service, which is raising its price by $3 to $9.99 per month. ESPN+ is also part of the $19.99 per month “Disney Bundle” that includes Disney+ and Hulu.

Shares of Disney rose $2.92, or 2%, to $124.49 at noon. The stock is down about 20% since the start of the year.

Robert D. Coleman