Disney Facing Complexities with Potential ESPN Spin-Off

Facing a challenge from yet another activist investor, The Walt Disney Co. (NYSE: DIS) could examine spinning off ESPN and perhaps all of its traditional media business. But there are complexities tied to such a transaction.

ESPN spin-off
Trian Fund Management managing partner Nelson at a 2016 conference. Disney may consider spinning off ESPN to appease him. (Image: Mike Blake/Reuters)

There’s speculation among investment bankers that Disney could move forward with plans to separate ESPN and possibly ABC-TV in a bid to placate new activist investor Nelson Peltz. Last week, Peltz revealed that his Trian Fund Management purchased approximately 9.4 million shares of Disney, then valued at around $900 million. He joined Third Point founder Daniel Loeb as the activists that took stakes in Disney in recent months.

Peltz is pushing for a board seat — a proposition Disney is rebuffing — but in Trian’s “Restore The Magic” presentation, the investor says it is not seeking a breakup of Disney. In fact, neither ESPN nor sports wagering are highlighted anywhere in the Trian materials.

When Third Point revealed its Disney stake last August, the hedge fund overtly mentioned the idea of an ESPN spin-off, positioning the sports broadcast network to capitalize on the proliferation of sports wagering. But the following month, Loeb backed away from that idea, saying Disney remaining whole was preferable.

Iger Return Could Hasten ESPN Spin-Off

Some analysts believe that Bob Iger’s recent return as chief executive officer of Disney could be an impetus for the spin-off of ABC and ESPN, because the prevailing wisdom is that Iger wants to focus on the company’s theme parks and intellectual property offered by assets such as Marvel, Pixar, and Star Wars.

Traditional media don’t offer the economic benefits of Disney’s intellectual property-rich franchises. It remains to be seen if Peltz will warm to the idea of separating old guard media assets. But he clearly says Trian isn’t auguring for a breakup of Disney, nor does the investor want the company to cut costs in such a way that consumers will be ruffled.

Disney has an incredible legacy as one of the leading and most successful consumer entertainment companies in the world, having built some of the most celebrated consumer brands and an unparalleled content portfolio that resonates with audiences of all ages across the globe. But in recent years, the Company has lost its way resulting in a rapid deterioration in its financial performance from a consistent dividend-paying, high free cash flow generative business into a highly leveraged enterprise with reduced earnings power and weak free cash flow conversion,” he wrote.

Trian’s presentation also notes Disney’s streaming arm, which includes fast-growing ESPN+, has lost more than $11 billion to date and is significantly less efficient than rival Netflix (NASDAQ:NFLX).

Trian Wants Dividend Restored

One point of emphasis in the Trian materials is a demand for Disney to restore its dividend. From 2010 through 2019, the payout grew five-fold. But Disney cut the dividend in half in 2020, and eliminated it outright the following year.

While some of that blame was attributable to the coronavirus pandemic causing months-long closures of theme parks, Peltz argues Disney paid too much in the $71.3 billion takeover of 21st Century Fox, which was finalized in March 2019. Oddly enough, that transaction led to Disney receiving a 6% stake in DraftKings.

Peltz is viewed as one of Wall Street’s more esteemed activist investors, and his Trian Fund Management has successfully pushed for change at companies including DuPont, Heinz, Procter & Gamble and Wendy’s, among others. However, Disney pointed out Trian has no experience with large-cap new media or technology firms.

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