WSJ US BusinessDan Loeb’s Third Point Calls for Disney to Spin Off ESPN, Refresh Board

August 15, 20220
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Activist investor Dan Loeb’s Third Point LLC has bought a new stake in Walt Disney Co. DIS 2.12% and is calling on the media company to buy the rest of Hulu, explore spinning off ESPN and refresh its board.

Mr. Loeb on Monday said his firm, which liquidated a large Disney DIS 2.12% stake earlier this year, has repurchased a “significant stake” in the company and sent a letter to Disney Chief Executive Bob Chapek urging the company to engage with Third Point on a number of issues.

Mr. Loeb praised growth in Disney’s streaming subscriber base, but also wanted Disney to more aggressively cut costs and consider a number of steps to shake up its portfolio.

The investor’s calls come at an inflection point for Disney and the streaming industry at large, which enjoyed torrential growth during Covid-19 but now face headwinds that include financial losses, domestic subscriber saturation and the introduction of new ad-supported tiers.

Mr. Loeb also now represents a fresh challenge for Mr. Chapek, who assumed the CEO job in February 2020, one month before Covid-19 shut down his company’s theme parks and the nation’s movie theaters. Earlier this year, Mr. Chapek found himself under fire from his own employees and Florida Gov. Ron DeSantis over his response to the state’s bill known by opponents as the “Don’t Say Gay” legislation.

Mr. Chapek was renewed to a three-year contract this summer, and recent subscriber growth in Disney’s flagship service, Disney+, has shown the company is advancing on the streaming industry’s dominant player, Netflix Inc. A spinoff of ESPN—itself a source of paying subscribers through its ESPN+ offering—would radically alter Disney’s presence in the streaming ecosystem.

“We welcome the views of all our investors,” Disney said in response to Third Point’s letter. The company said its board has been continuously refreshed, “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: FX Networks/Hulu/Everett Collection

Third Point is pushing Disney to “make every attempt” to buy up Comcast Corp.’s CMCSA 1.54% remaining minority stake in the streaming giant Hulu before its contractual deadline in early 2024. Under a 2019 agreement, Comcast can require Disney to purchase its NBCUniversal subsidiary’s one-third stake in Hulu by that deadline for at least $9 billion, assuming the streaming service has an equity value greater than $27.5 billion.

“We believe that it would even be prudent for Disney to pay a modest premium to accelerate the integration but are cognizant that the seller may have an unreasonable price expectation at this time,” Mr. Loeb’s letter says.

Disney and Comcast have been in a dispute over the value of Hulu, The Wall Street Journal previously reported. When Disney took majority control of Hulu in 2019, the service was valued at a minimum of $27.5 billion. Comcast believes the value of Hulu is now closer to $70 billion, people familiar with the matter have said.

The two companies have already started to unwind some aspects of their partnership. Comcast’s NBCUniversal earlier this year exercised an option to exit its content-sharing agreement with Disney, the Journal reported. Content from NBCUniversal that previously would have gone to Hulu after airing on NBC and NBC-owned cable channels will now go directly to Peacock, NBCU’s streaming service.

Mr. Loeb’s letter also states that there is a “strong case to be made” that Disney should spin off its ESPN business to shareholders to alleviate leverage at the parent company, despite ESPN’s centrality to the company’s streaming offerings and the significant free cash flow it generates.

Mr. Loeb suggests that synergies between Disney and ESPN could be replicated through contractual arrangements. A spinoff would drive better long-term value for Disney shareholders and result in a business “no longer haunted by the specter of cord-cutting,” the letter says.

Cord-cutting has driven Disney to make drastic changes to its business model in the past. In the summer of 2015, former Disney CEO Robert Iger acknowledged that the company was seeing “some subscriber losses” to ESPN. One year later, ESPN lost two million subscribers, dropping to its lowest count 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—fell in relevance and revenue.

ESPN’s troubles—and Wall Street’s response to them—were one reason Mr. Iger would decide to launch his own streaming service. Disney+ premiered in the fall of 2019, and its rocketing growth in its first 18 months caused Disney shares to rise even as Covid-19 wrecked other parts of the business.

Hollywood has been rampant with rumors about the future of ESPN since those first indications of subscriber losses, with rivals speculating that a spinoff or sale was 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 as of the most recent quarter, ESPN+ has 22.8 million and Hulu has 46.2 million.

Mr. Loeb’s letter also urges the company to rethink the makeup of its board and consider a list of potential new members that Third Point has compiled. It also advocates for a wide-ranging 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 its 2022 fiscal year after it earlier had estimated $32 billion.

Mr. Loeb has been a thorn in the side of studio chiefs before. In 2013, he bought a stake in Sony Group Corp. and publicly criticized the company’s movie arm, Sony Pictures Entertainment. He called on the company to make cuts to the division and introduce “discipline and accountability.”

Soon after Mr. Loeb’s disclosure of a 7% stake, Sony Pictures’ then-CEO pledged to find at least $350 million in annual savings. Mr. Loeb sold his stake about a year later, but has called on 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 which came to the service amid its expansion internationally.

The company’s new customer additions brought its total at all of its streaming services, including Disney+, Hulu and ESPN+, to 221.1 million subscribers, which puts Disney’s streaming total narrowly ahead of rival Netflix Inc., which last month reported it had 220.67 million subscribers.

Disney’s share price is up more than 12% in the past week, but remains down about 20% since the start of the year, amid a broad pullback in technology and media stocks.

Last week, Disney also announced price increases to its streaming services, including for its planned ad-supported tier of Disney+, a move that industry executives and analysts said is intended to help drive profitability at its streamers.

Disney, whose direct-to-consumer segment has lost more than $7 billion since Disney+ launched in late 2019, predicts that Disney+ will achieve profitability by September 2024.

“We have plenty of room on price 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 plow the funds instead into the streaming business.

But by the first quarter of this year, the hedge fund had completely exited its position. Mr. Loeb had become worried that it would take years for Disney’s streaming business to reap the profits needed to boost the company’s share price, a person familiar with his thinking told The Wall Street Journal in May.

Since 1967, the Florida land housing Disney’s theme parks has been governed by the company, allowing it to manage Walt Disney World with little red tape. WSJ’s Robbie Whelan explains the special tax district that a Florida bill would eliminate. Photo: AP

Write to Dean Seal at dean.seal@wsj.com and Erich Schwartzel at erich.schwartzel@wsj.com

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