Earlier this month, the hedge fund Third Point — run by CEO Daniel Loeb — purchased a stake in The Walt Disney Company. After the purchase, Loeb became what’s known as an “activist investor”. Loeb is also working on buying Comcast’s 33% stake in Hulu. If that happens, Third Point and Disney will be the two owners of Hulu. After the company’s purchase, Loeb sent a letter to Disney, saying that he wants to work with The House of Mouse on cutting costs at assets that are underearning. He also suggested that Disney should work to make ESPN its own entity.
Loeb pointed out how successful ESPN is and by making it a spinoff, Disney would be able also to pass off a considerable debt load that would “alleviate leverage that the Parent company.” However, making ESPN its own entity may be the last thing that Disney wants to do. The Wrap spoke to several analysts who all agreed that, for the time being, Disney should hold on to ESPN with both hands.
According to the analysts who spoke to The Wrap:
Disney’s ownership of ABC helps the cable network contribute to the hefty cost of sports broadcast rights and provides more potential eyeballs (ABC will simulcast “Monday Night Football” with ESPN this NFL season, for example). Disney’s support systems and resources are a boon for ESPN — and TV networks/streamers should want that sort of corporate safety net.
Plus, ESPN currently serves as a profit center that the conglomerate desperately needs. Disney has bled $3 billion in cash over the last nine months, including a loss of $1.1 billion on its direct-to-consumer segment in the most recent quarter. It needs to be able to sustain these streaming losses, which are expected to peak this year, while paying down roughly $50 billion in debt and around $1.8 billion in interest each year. That’s some suboptimal math right there.
“Disney needs capital — why would you deprive it of a cash generative force?” Wetlaufer said of ESPN.
This past quarter, ESPN was one of Disney’s “linear network segments” that helped generate $7.2 billion in revenue for The Walt Disney Company. In addition to that, ESPN+ continues to see an increase in subscribers, all of which translates to more money for Disney. It’s true that ESPN has been steadily losing its customer base, however, analysts point out that if ESPN were to become its own entity, the ESPN spinoff would see an increase in overhead cost, therefore making it more expensive to run than it currently is.
Not long after Loeb’s letter went public, Disney responded with a letter of its own. The company said that it appreciates the views of all of its investors, but after such a positive earnings call with Disney CEO Bob Chapek, the company was going to continue on the path it had already set out. Basically, Disney gave Loeb a very polite “thank you, but no, thank you.”
Even though ESPN is declining in customers — mostly because of the decline in traditional cable subscribers — the network still brings money to Disney. Disney’s streaming service Disney+ is not expected to be profitable until 2024, so having ESPN’s profits only works in Disney’s favor.
Immediately after Loeb announced the Disney purchase, increased nearly 3%.