Dan Loeb’s Third Point Calls for Disney to Divest ESPN, Take Control of Hulu

Brian Steinberg
·4 min read
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Wall Street recently cheered Disney’s fiscal performance, judging by how the stock has performed since the company offered details of its third quarter performance. And yet, there are some investors who still think the owner of ABC, Disney World and Hulu has much further to go.

In an Aug. 15 letter to Disney CEO Bob Chapek, activist investor Third Point LLC disclosed that it had purchased a stake in Disney and suggested that Disney consider spinning off sports-media juggernaut ESPN, buying out Comcast’s stake in Hulu and reconfiguring its board of directors. Loeb had previously owned shares and pressed Disney to suspend its dividend while its operations were affected by the coronavirus pandemic.

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“We expect to see the quality of Disney’s financial results improve as the Company’s business shifts further” into the direct-to-consumer arena, Third Point CEO Daniel Loeb said in the note to the Disney chief, while noting that “our confidence in Disney’s current trajectory is such that we have, in recent weeks, repurchased a significant stake in the Company.”

Loeb suggested that Disney “embark on a cost cutting program that addresses both margins and the disposal of excess underperforming assets” and not restore its dividend. Loeb also recommended that Disney consider buying up Comcast’s minority stake in Hulu ahead of the 2024 contractual deadline when Disney must do so. And he suggested that Disney spin off ESPN while maintaining contractual links to the sports outlet, in such a way that ESPN will be able to delve more deeply into sports betting. Finally, Loeb called for a “board refresh,” and said he had some potential candidates in mind.

“We welcome the views of all our investors,” Disney said in a statement, while noting that its recent results show the company delivering  “strong performance while navigating the COVID-19 pandemic and its aftermath.” Disney said its “independent and experienced Board has significant expertise in branded, consumer-facing and technology businesses as well as talent-driven enterprises. The Board has also benefited from continuous refreshment with an average tenure of four years.”

Third Loeb’s interest is the latest challenge to Disney, which is in the midst of a massive reorganization of its portfolio that is orienting the company more readily towards streaming and broadband consumption by its fans. Disney has in recent months moved some of its most recognizable content — some Pixar movies and ABC’s “Dancing With The Stars,” for example — over to Disney+. Disney recently reported that subscriptions to its three main streaming outlets — Disney+, Hulu and ESPN+ — were greater in total than the number of people subscribing to one of its biggest rivals, Netflix.

Fulfilling some of Third Point’s requests would rework the structure of Disney’s operations in significant fashion. Even though it has lost subscribers, like many cable networks competing in an era of so-called “cord cutting,” Disney’s ESPN and several other related cable networks throw off a significant amount of advertising and subscription revenue each year for their parent company. What’s more, buying out Comcast’s Hulu stake would not be cheap.

Loeb acknowledged some of these issues, but urged Disney to move forward. “ESPN would have greater flexibility to pursue business initiatives that may be more difficult as part of Disney, such as sports betting. Customers of ESPN and sports leagues would be better served by a focused management team driving a leadership position in sports distribution,” he said. “We believe that most arrangements between the two companies can be replicated contractually, in the way eBay spun PayPal while continuing to utilize the product to process payments.”

Comcast at present owns about one-third of Hulu, although Disney manages the streamer directly. Third Point believes Disney would do well to take control now, rather than waiting until the current ownership arrangement lapses. “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 (while noting the seller has already made the decision to prematurely remove their own content from the platform.)” Loeb wrote. “We know this is a priority for you and hope there is a deal to be had before Comcast is contractually obligated to do so in about 18 months.”

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