Why Disney’s Future Is Up in the Air | Analysis

Bob Iger bought himself time by extending his contract through 2026. But the Disney CEO still has a lot to juggle when he addresses Wall Street on Wednesday.

Normally a punctilious diplomat, Iger sent a shockwave through his company and the industry when he all but put Disney’s broadcast and cable networks up for sale by telling CNBC they “may not be core.” He’s on the hunt for strategic partners to take ESPN fully direct-to-consumer. And there’s still the Hulu deal he has to clinch with Comcast.

It all adds up to a heady moment and a heavy burden for the two-time CEO. On his first stint, he reshaped Disney by adding to it with acquisitions: Pixar, Marvel, Lucasfilm, Fox. Now he may have to subtract. The hard choices may end up being which ball to drop.

Challenges abound outside of these strategic dilemmas. Investors have raised concerns in recent weeks about slowing growth at Disney’s theme parks. Questions still remain around how badly Hollywood’s historic double strike will gum up Disney’s content machine. And Iger has to find a new chief financial officer following the exit of Christine McCarthy on top of his own replacement.

“I don’t think there’s a lot of optimism generally” among investors, Bloomberg Intelligence analyst Geetha Ranganathan told TheWrap. “Even on the parks side, I think there’s a little bit of concern that projections may be too bullish.”

Cable networks for sale, heavily used

Divesting the linear assets — ABC and the Disney cable networks, except for ESPN — could boost Disney’s stock by $10 per share, according to Wells Fargo, and yield $19 billion to $23 billion, Bloomberg Intelligence estimated. Disney’s businesses in India, Disney+ Hotstar and Star India, which it got as part of the Fox deal in 2019, could fetch as much as $980 million, Ranganathan added. It’s unclear who might buy them, but she pointed out that private equity is always interested in assets that generate cash flow.

Unlike some of its rivals, Disney can afford to let go of those networks, because its theme parks generate steady cash flow, Wells Fargo analyst Steven Cahall pointed out, and their sale could help fund the purchase of the minority stake in Hulu that Comcast still owns. Comcast can force Disney to buy its 33% stake early next year for a price of at least $9 billion.

But shedding assets also means forgoing future growth opportunities built around them. Macquarie analyst Tim Nollen worried that a sale of the India business would “bring in some welcome cash” at the cost of losing a large market for its streaming services. Disney still needs to grow its streaming business, which continues to burn cash and won’t become profitable until next fiscal year, according to the company’s past guidance.

Disney has had talks with sports leagues including the NFL, NBA and MLB about becoming minority investors in ESPN, CNBC previously reported. They — or other investors — could become strategic partners to fund the unit’s full transition to streaming.

But Keybanc analyst Brandon Nispel said it’s “tough to envision a world where the leagues actually own part of the distribution network.”

Iger has suggested that a full direct-to-consumer version of ESPN is an “inevitability,” though an exact timeline for its launch and eventual pricing remain unclear. Bloomberg Intelligence believes the launch could come as early as 2025. At $20 per month, ESPN would need 8.1 million subscribers by 2026 to offset losses in affiliate revenue from cord-cutting, the research unit said. The service might also bring in $6 to $7 a month in ad revenue per subscriber, Ranganathan said.

A Mouse House reunion

Iger has brought on former Disney executives and Candle Media co-CEOs Kevin Mayer and Tom Staggs to consult on the company’s linear and streaming strategy and work with ESPN chairman Jimmy Pitaro to analyze options for the sports network.

Mayer and Staggs have a “rich history” at Disney and are “intimately familiar” with its businesses, Ranganathan noted. The pair have both previously been floated as potential successors to Iger.

“It’s quite possible that he’s considering [Mayer and Staggs as possible successors] or it may really just be for consultancy,” she said. “It’s really hard to say at this point, but there is no skirting around the fact that succession still remains the primary issue for Disney apart from all of its other business and operational challenges.”

Beyond its succession challenge, Needham & Company senior entertainment and internet analyst Laura Martin worried that Disney is “too small to win the streaming wars as a standalone company.”

Amazon, Alphabet and Apple, with their trillion-dollar market caps “will be the largest global aggregators of audiences,” she wrote in a recent research note. Disney would be better off bundled into a purchaser’s core business, she added.

Martin also expressed concern about Disney’s “enormous” debt as a result of the 2019 Fox deal, which stood at $48.5 billion at the end of March. “As interest rates rise, this debt becomes more expensive,” Martin said.

The strikers strike back

Iger may find himself trying to reconcile with members of the Writers Guild of America and SAG-AFTRA after calling the unions’ demands “unrealistic.” Wednesday’s earnings call will be an opportunity to smooth over his previous remarks, which Ranganathan called “tone-deaf.”

“I think after that CNBC interview, Bob sort of had a lot of egg on his face. That was not the best way to play into sort of a serious situation with a lot of your suppliers of content,” Nispel said. “So my guess would be he’s going to have to walk that back somewhat.”

An extended strike could mean delays to theatrical, linear television and streaming content and hit EBITDA, Nispel added, even if it yields short-term cash flow benefits.

Though the WGA and AMPTP held a meeting on Friday, the two parties appear to be at a stalemate with no timeline for when contract negotiations could restart.

“There’s no way to spin it other than the strike is negative the longer it goes,” Nispel added. “Yes, they can save free cash flow in the near term, but it doesn’t make the underlying fundamentals of this business any more attractive.”

Theatrical in transition

2023 has been a challenging year for Disney, normally the box office leader. “The Super Mario Bros. Movie” and “Barbie,” not a Marvel superhero film or a Disney animation, have defined the year so far. Pixar, in particular, has struggled. Iger needs to reboot its live-action franchises and revive its brands.

The performance, Nispel wrote in a research note, may reflect “less of an animation/superhero slump at the box office and more of a structural reality that consumers will expect to watch this type of content at home.” Disney, he added, “needs to fundamentally rethink its content creation strategy.”

Disney shares closed Wednesday at $86.83, down 2.4% year to date and 57% from their all-time high of $201.91 in March 2021. Analysts surveyed by Zacks Investment Research are expecting earnings of 99 cents per share on revenue of $22.4 billion.

Gerber Kawasaki Management CEO Ross Gerber acknowledged that while this quarter’s results will “likely be grim,” the company’s issues are “easily fixable.”

“Most folks have given up on Disney,” Gerber told TheWrap. “However, it’s still one of the cheapest value stocks on the market.”

A Disney spokesperson didnt immediately return TheWrap’s request for comment.

The post Why Disney’s Future Is Up in the Air | Analysis appeared first on TheWrap.