Media giant The Walt Disney Company DIS is making a major change in a move that it hopes could help its stock price rebound and also keep fans happy after years of major concerns. The move could also see the company make major changes to its structure and business segments.
What Happened: Disney is bringing back Bob Iger as its CEO, a man who previously led the company for 15 years, before stepping down in 2020. Iger replaces Disney CEO Bob Chapek, who previously led Walt Disney.
Disney will be undergoing a restructuring effort under Iger’s leadership, according to a new report. Among the early changes is to reorganize the Disney Media & Entertainment segment. Iger announced that Kareem Daniel, chairman of media and entertainment distribution, has departed the company.
The move to bring Iger back was well received by investors, with shares of Disney up significantly on Monday, a day after the news. Analysts are now questioning what Iger being brought back could mean for the company.
“We believe Disney’s Board made the decision to reinstate Bob Iger as CEO and release existing CEO Bob Chapek for many of the same reasons they parted company with then CEO heir apparent Tom Staggs back in 2016 – lack of confidence in the executive’s creative leadership abilities,” Deutsche Bank analyst Bryan Kraft said.
Kraft, who has a Buy rating and $130 price target, said the change by Disney could have a lot to do with Chapek’s handling of controversial issues. With the decision made, the analyst is now predicting what may happen with Iger once again in charge of the "House of Mouse."
Among the key changes Kraft highlights in the updated analyst note are driving cost efficiencies and improving profitability.
“With respect to DTC, we do not see Mr. Iger changing the strategic direction meaningfully given that the company already reached peak DTC losses last quarter and is on the path to becoming profitable in F2024.”
One big question mark for the analyst centers around Disney’s ownership of sports brand ESPN.
“The larger question as it relates to Linear Networks is whether Mr. Iger will decide to do something more structural, such as asset sales. Many have called for a sale of ESPN, and Mr. Iger has surely evaluated this option in the past as CEO, without moving forward.”
The analyst said the sale of ESPN could provide needed cash for “deleveraging,” but could also hurt the company’s free cash flow.
“We don’t rule out this possibility, but it is difficult to see how Linear Networks would be worth more to a potential acquirer than to Disney, especially given the interest rate environment.”
Why It's Important: Over the years, two of the biggest question marks and ideas from analysts and activists have centered on Disney’s ownership of ESPN and Disney’s 67% ownership of streaming platform Hulu.
Activist investor Dan Loeb laid out five keys for Disney after taking a stake in the company. Among them was a call to spinoff ESPN. Loeb said a spinoff of ESPN could unlock shareholder value.
“We believe that a strong case can be made that the ESPN business should be spun off to shareholders with an appropriate debt load that will alleviate leverage at the parent company,” Loeb said.
Loeb acknowledged there being synergies between ESPN and Disney, but also considered the benefits of the businesses operating separately.
“ESPN would have greater flexibility to pursue business initiatives that may be more difficult as part of Disney, such as sports betting.”
Chapek said earlier this year that he wanted to retain the ESPN business despite getting several offers after rumors of a sale popped up.
“If everyone wants to come in an buy it… I think that says something about its potential,” Chapek said.
Disney owns 67% of Hulu and has Comcast Corporation CMCSA, a rival media company, as a partner who owns 33% of the venture. Comcast has a deal in place to sell its Hulu stake to Disney as early as 2024 based on fair market value.
Chapek recently said he wanted to move up the timing of acquiring the remaining Hulu stake.
“I do believe that we have to have full ownership of Hulu to integrate with Disney+, and we would love to get to the endpoint earlier,” Chapek said.
Comcast said it was not willing to sell without getting a premium, and would not be looking to get a lower price prior to its in-place fair market deal. Comcast was also open to buying Hulu outright and merging it with its Peacock streaming platform.
Disney has more streaming customers than rival Netflix Inc NFLX when its Disney+, Hulu and ESPN+ subscribers are included. The question for Iger will be whether to focus on one or two platforms, or continue to build out the content across all three and get stuck paying a likely hefty premium for the remaining Hulu stake in two years.
The letter from Loeb also laid out cost-cutting as a priority, an effort that could be helped by making moves on both ESPN and Hulu.
Shareholders were rewarded with strong returns during Iger’s run as CEO. Activists and analysts could continue to push Iger and Disney to make changes, but Iger likely has a plan in place in his head that he hopes to accomplish over the next two years.
DIS Price Action: Disney shares are down 2% to $95.56 on Tuesday.
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