Activist investor Dan Loeb’s Third Point LLC has acquired a new 2.21% stake in Walt Disney Co. DIS and is urging the media company to buy the rest of Hulu, explore spinning off ESPN and refresh its board.
Mr Loeb said on Monday his firm, which liquidated a major Disney stake earlier this year, had repurchased a “significant stake” in the company and sent a letter to Disney chief executive Bob Chapek telling him the company prompted to get involved with Third Point on a number of issues.
Mr. Loeb praised the growth of Disney’s streaming subscriber base, but also wanted Disney to cut costs more aggressively and consider a number of moves to shake up its portfolio.
The investor’s calls come at a tipping point for Disney and the broader streaming industry, which has experienced rapid growth during Covid-19 but is now facing headwinds that include financial losses, saturation of domestic subscribers and the launch of new ad-supported tiers .
Mr. Loeb also now poses a new challenge for Mr. Chapek, who took over the job of CEO in February 2020, a month before Covid-19 shut down his company’s theme parks and cinemas across the country. Earlier this year, Mr. Chapek came under fire from his own staff and Florida Gov. Ron DeSantis for his response to the state law, known by opponents as the “Don’t Say Gay” legislation.
Mr. Chapek was signed to a three-year contract this summer, and recent subscriber growth on Disney’s flagship service, Disney+, has shown the company is gaining ground over Netflix Inc., the streaming industry’s dominant player. A spinoff from ESPN — itself a source of paid subscribers through its ESPN+ offering — would radically change Disney’s presence in the streaming ecosystem.
“We welcome the views of all of our investors,” Disney said in response to Third Point’s letter. The company said its board has been renewed on an ongoing basis, “with an average tenure of four years.”
The Bear, a popular show on Hulu; A Disney investor is urging the company to buy Comcast’s remaining stake in the streaming giant.
Photo Credit: FX Networks/Hulu/Everett Collection
Third Point is urging Disney to “make every attempt” to sell Comcast Corp’s remaining CMCSA minority stake. to acquire a 1.29% stake in streaming giant Hulu before the deal expires in early 2024. Under a 2019 agreement, Comcast can require Disney to purchase a one-third stake in the NBCUniversal subsidiary’s Hulu for at least $9 billion by that date, assuming the streaming service has an equity value of more than $27.5 billion U.S. dollar.
“We believe it would be wise for Disney to even pay a modest premium to expedite the integration, but recognize that the seller may have an inappropriate price expectation at this point,” Mr. Loeb’s letter reads.
Disney and Comcast have fallen out over the value of Hulu, the Wall Street Journal previously reported. When Disney took a majority stake in Hulu in 2019, the service was valued at at least $27.5 billion. Comcast believes Hulu’s value is now closer to $70 billion, people familiar with the matter said.
The two companies have already begun dissolving some aspects of their partnership. Comcast’s NBCUniversal exercised an option to exit its content-sharing agreement with Disney earlier this year, the Journal reported. NBCUniversal content that previously would have gone to Hulu after airing on NBC and NBC-owned cable channels will now be sent directly to NBCU’s streaming service, Peacock.
Mr. Loeb’s letter also said there are “strong arguments” that Disney should spin off its ESPN business to shareholders to reduce leverage at the parent company, despite ESPN’s centrality to the company’s streaming offerings company and the significant free cash flow generated.
Mr. Loeb suggests that synergies between Disney and ESPN could be replicated through contractual arrangements. A spin-off would increase long-term value for Disney shareholders and result in a company “no longer haunted by the specter of cable-cutting,” the letter said.
Wire cutting has historically prompted Disney to make drastic changes to its business model. In the summer of 2015, former Disney CEO Robert Iger acknowledged that the company was seeing “some subscriber losses” to ESPN. A year later, ESPN lost two million subscribers, falling to its lowest level since 2005.
That steady decline became an albatross on Disney’s stock price, which fell as investors feared a future in which ESPN — once a top moneymaker — lost prominence and revenue.
ESPN’s troubles — and Wall Street’s reaction to them — was one of the reasons Mr. Iger would decide to launch his own streaming service. Disney+ premiered in the fall of 2019, and its rapid growth over its first 18 months sent Disney shares soaring even as Covid-19 wrecked other parts of the business.
Hollywood has been rife with rumors about ESPN’s future since those first signs of subscriber losses, with competitors speculating that a spin-off or sale is in its future. Today, the sports network is one of three core components of Disney’s streaming bundle, along with Disney+ and Hulu.
Disney+ has 152.1 million subscribers, ESPN+ has 22.8 million, and Hulu has 46.2 million as of the most recent quarter.
Mr. Loeb’s letter also prompts the company to reconsider the composition of its board of directors and to consider a list of potential new members that Third Point has compiled. It also advocates a far-reaching cost-cutting program and the continuation of Disney’s pandemic-era suspension of cash dividend payments.
Disney said last week it would spend $30 billion on content in fiscal 2022, after previously estimating $32 billion.
Mr. Loeb has been a thorn in the side of studio bosses before. In 2013, he acquired a stake in Sony Group Corp. and publicly criticized the company’s film division, Sony Pictures Entertainment. He called on the company to make cuts in the division and introduce “discipline and accountability.”
Shortly after Mr. Loeb announced a 7% stake, the then-CEO of Sony Pictures pledged to find at least $350 million in annual savings. Mr. Loeb sold his stake about a year later but urged Sony to make changes to its entertainment division in the years since.
Last week, Disney reported better-than-expected earnings and added 14.4 million new subscribers to its Disney+ streaming service, many of whom joined the service as part of its international expansion.
The company’s new subscriber additions brought the total number of subscribers across all of its streaming services, including Disney+, Hulu, and ESPN+, to 221.1 million, putting Disney’s streaming total just ahead of competitor Netflix Inc., which had 220.67 million subscribers last month would have.
Disney’s stock price is up more than 12% over the past week but remains down about 20% since the start of the year amid a broad pullback in tech and media stocks.
Last week, Disney also announced price increases for its streaming services, including for the planned ad-supported tier of Disney+, a move that industry leaders and analysts say should help boost its streamers’ profitability.
Disney, whose direct-to-consumer segment has lost more than $7 billion since Disney+ launched in late 2019, projects Disney+ will be profitable by September 2024.
“We have a lot of wiggle room for value,” Mr. Chapek said last week.
Third Point previously held 4.1 million shares of Disney and successfully pushed the company to suspend its $3 billion annual dividend and instead channel the funds into its streaming business.
But by the first quarter of this year, the hedge fund had completely exited its position. Mr. Loeb had worried it would take years for Disney’s streaming business to generate the profits needed to boost the company’s stock price, a person familiar with his mindset told The Wall Street Journal in May.
Since 1967, the Florida property that houses Disney’s theme parks has been managed by the corporation, allowing it to manage Walt Disney World with little bureaucracy. WSJ’s Robbie Whelan explains the special tax district a Florida bill would eliminate. Photo: AP
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