Back in August, a hedge fund called Third Point LLC — run by CEO Daniel Loeb — purchased a lot of stock in Disney. While Third Point only owns about .4% of The Walt Disney Company, that is still a lot. Not long after the purchase, Loeb reached out to now-fired Disney CEO Bob Chapek and told Chapek that he thought Disney should spin off ESPN. That would move would potentially bring Disney the capital that it needed.
Analysts scoffed at the idea, and Chapek basically said, “thank you, no, thank you.” Soon after, Loeb retracted the idea.
However, it now looks like Loeb’s idea may not have been so crazy after all. In fact, it appears that he may have been dead on, as analysts are now saying that Disney should spin off both ESPN and ABC. Recently, Well-Fargo analyst Steve Cahall hosted a call where he spoke of The Walt Disney Company. Parts of the conversation were shared with The Hollywood Reporter:
“We think Bob Iger is returning to Disney to make big changes. Spinning [off] ESPN/ABC is the best path forward, and we see it as a reasonably probable late-’23 event.” Wells Fargo analyst Steven Cahall opened a Tuesday report on The Walt Disney Co., led again by Iger as CEO, with a big call that is certain to cause debate.
The analyst, who has an “overweight” rating with a $125 price target on Disney, making it a “signature pick” of his firm, argued that it was “time for change.” Disney stock was trading at 86.14 a share Tuesday, down 45 percent year-to-date.
“However, over the longer term, we expect a deeper think on portfolio reshaping. Recall that Iger built Disney into what it is today: a franchise IP leader with global scale. ESPN, traditionally the cash cow, is neither owned-IP nor global the way the rest of Disney is. With linear and sports trends diverging from core IP, we think severing the company is increasingly logical.”
In most cases, it would appear that a CEO would have a good idea of what is best for the company they run. However, in this case, it looks like an analyst who had never worked with Disney was more aware of the right track than Bob Chapek. Loeb felt that spinning off ESPN would allow Disney to drop something that was costing The House of Mouse a lot of money.
Cahall shared more on what the best path forward for ESPN may be:
Cahall noted, though, that “if Disney sees the world the way we do, then it has work to do in prep of a spin.” He then mentioned potential initiatives and moves that could be in store. “First, we think ESPN would go a la carte in streaming as that band-aid is long overdue to be ripped off in a world of accelerating cord-cutting. That puts pressure on ESPN/ABC’s linear cash flows, and Disney’s non-ESPN/ABC linear networks (which are high margin). Second, Disney needs to work hard on cost rationalization to ease the burden of losing ESPN/ABC’s earnings and cash. Third, Disney might consider a Hulu sale to shore up the balance sheet and assuage fears from debt rating agencies.”
It is slightly surprising that Chapek didn’t seem to see where Loeb was coming from, considering he was thought to be someone who only cared about finding ways to make money and cut costs. In his less than three years as Disney CEO, Chapek earned himself several unflattering names, including “Bean Counter Bob”, “Bob Cheapek”, and “Bob Paycheck.”
Newly reinstated CEO Bob Iger has not said what his plans are for both ESPN and ABC, but analysts are predicting that he may sell both. Iger is known as a great dealmaker. The first time he was CEO of Disney, he acquired Pixar, Marvel, LucasFilm, and 21st Century Fox. Separating ESPN and ABC from Disney could also help raise Disney shares, which have been at an all-time low.