The Billionaire Investor That Wants Disney To Spin-Off ESPN

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(Dan Loeb via Bloomberg)

Hey Friends,

Billionaire investor Dan Loeb is known as an agitator on Wall Street. He runs Third Point, a New York-based Hedge Fund, and he has become famous for launching activist campaigns against corporate boards and shaking up companies.

And now it looks like he has picked his next target: Disney and ESPN.

Third Point disclosed a stake of roughly $1 billion in Disney DIS on Monday and mentioned (through a strongly worded letter) that they want the media company to make a string of changes, from spinning off their cable sports network ESPN to buying back shares and adding new board members.

The full letter is interesting, but here is the ESPN excerpt specifically:

As you can see, Dan Loeb and Third Point have developed a simple four-part framework to determine if a business is worth spinning off (I.e. they believe separating the two companies would increase shareholder return).

He asks:

• Will both companies be better off?

• Will the needs of customers be better served?

• Can any synergies that exist between the two companies be replicated by contractual arrangements?

• Will the transaction contribute to creating long-term value for Disney shareholders?

I think this is a fair framework. And at the least, it breaks down a seemingly complex decision into a much more straightforward set of questions. But I also think a decision like this is incredibly nuanced.

For example, Loeb says that by spinning off ESPN from Disney, both companies will attract investors that are individually interested in each separate company, rather than being forced to invest in both through Disney.

That certainly makes sense, at least on a surface level. A media company dependent on live sports rights and declining cable revenues would probably trade at a 5-6x multiple—compared to Disney’s 14x multiple.

But it also ignores the fact that ESPN is currently a bright light for Disney.

For example, ESPN’s linear channels have become so integral to the overall cable bundle that they can charge traditional TV providers $10 per month per subscriber, regardless of how much those subscribers actually watch the network.

That (combined with ESPN+) is expected to generate more than $12 billion in revenue this year and nearly $4 billion in operating profit for the company, and CEO Bob Chapek even specifically credited the company’s live sports rights for helping power a 50% jump in operating profit last quarter.

Also, that’s without mentioning the fact that Disney is currently exploring sports betting partnerships for ESPN, which could potentially bring in billions of dollars in revenue, or the concept that ESPN’s positive cash flow business is currently extremely valuable to Disney — many investors don’t seem interested in a company that is losing hundreds of millions of dollars as they fight for streaming subscribers.

So we’ll see what happens. Based on Dan Loeb and Third Point’s history, I imagine this is far from over. He previously convinced the entertainment company to suspend its dividend and go all-in on streaming, and now they have passed Netflix in subscribers just two years later. But this request would be a more significant shift in their overall business model, and my guess is that Disney probably won’t comply as quickly this time around.

I hope everyone has a great day. We’ll talk tomorrow.

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