ABC Sale Unfavorable for Disney: Dilution and FCC Regulations at Play, Analyst Says

Reportedly, Walt Disney Co DIS has been in preliminary talks with Nexstar Media Group, Inc NXST on potentially selling the ABC Network, which could be worth $4.0 billion or more. 

In a statement, Disney says it is exploring strategic options and has yet to make a final decision. 

In addition, reports suggest DIS will likely cut its target for Disney+ streaming subscribers from its previously provided range from 3Q22 of 215 million - 245 million. 

KeyBanc analyst Brandon Nispel sees a potential sale of ABC as unfavorable for DIS, while the cut of subscriber targets is neutral. 

A potential deal for ABC at $4.0 billion would likely be done on a highly dilutive basis, the analyst writes.

A sale of ABC tells that DIS's view on Pay TV is that it will soon implode, which implies applying meaningful discount rates to all linear cash flows.

FCC regulations limit TV station ownership to 39%, which Nexstar is already at and might make a sale challenging. 

The last time Disney reported Broadcast operating income was ~$2.0 billion for FY20. 

While the analyst believes advertising revenue has likely been under pressure, he would expect growth in retransmission consent and reverse comp to result in ABC's operating income of ~$2.0 billion, in line with DIS's last report. 

Nispel's valuation range would be ~$6 billion for ABC. 

For the Disney+ streaming subscriber target cut, the company last disclosed guidance during 3Q22, which included 80 million subscribers from Hotstar. 

While Hotstar subscribers would be down considerably from that number, a cut of tens of millions of subscribers to core Disney+ subscribers would be a material decrease from the 135 million - 165 million guide. 

Neither would surprise investors, given KeyBanc currently estimates Disney+ total subscribers of 150.7 million by FY24 vs. consensus of 159.1 million.

Price Actions: DIS shares traded higher by 0.65% at $85.03 on the last check Friday.

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