Activist investor Dan Loeb issued a letter to The Walt Disney Company DIS CEO Bob Chapek and the company’s Board of Directors Monday. Loeb took a stake in Disney via Third Point and is seeking to have constructive engagement with the company.
In the letter, Loeb congratulates Chapek on the recent quarter and the success of Disney+. The investor highlights a transition from theatrical releases to digital distribution, similar to a SaaS (software as a service) business model.
“We expect to see the quality of Disney’s financial results improve as the company’s business shifts further,” Loeb writes.
Here are five changes Loeb would like to see Chapek and Disney address.
Cost Cutting: Loeb said Disney’s costs are “among the highest in the industry.” The investor sees further cost-cutting improving margins. Disposing of underperforming assets is mentioned by Loeb as a cost-cutting measure.
Dividend Policy: Disney previously paid out semi-annual dividends before suspending the distribution in March 2020 due to the COVID-19 pandemic. The company is now one of only three of the Dow Jones Industrial Average stocks that don’t pay out regular dividends.
“We urge the company to preserve this policy and use free cash flow to pay down debt, repurchase shares, or organically reinvest in the business,” Loeb said.
Hulu Integration: Disney owns 67% of streaming platform Hulu, with Comcast Corp CMCSA owning the remaining 33%. Loeb would like to see Hulu integrated directly into the company’s Disney+ streaming platform. The investor said this can reduce costs and offer growth in the domestic streaming market.
Loeb also urges Disney to acquire Comcast’s stake in Hulu prior to a deadline of early 2024.
“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.”
ESPN Spinoff: ESPN is one of the most valuable sports brands in the world, and Loeb sees a spinoff of the business as an opportunity to unlock shareholder value. Loeb mentioned ESPN being part of a streaming bundle with Disney+ and Hulu and providing pricing power for Disney’s linear media business.
“Despite these advantages, 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.
The activist investor said Disney should consider if there are synergies between Disney and ESPN and if both companies will be better off as separate units.
“ESPN would have greater flexibility to pursue business initiatives that may be more difficult as part of Disney, such as sports betting.”
Loeb compares a potential spinoff of ESPN as being similar to eBay Inc EBAY spinning off PayPal Holdings PYPL, noting existing contracts between the two companies and “continuing to utilize the product to process payments.”
“While I understand you have considered this idea in the past, we urge the company to retain advisors to reassess the desirability of the transaction in the current environment.”
Board of Directors Refresh: Loeb would like to review the membership of Disney's Board of Directors and to bring in members that have experience and strengths in technology, advertising and consumer engagement.
“We believe there are gaps in talent and experience as a group that must be addressed.”
Loeb said Third Point has potential board members in mind and is ready to make an introduction.
Why It’s Important: Loeb said Third Point took a sizable stake in Disney recently, with Reuters indicating the stake was $1 billion and around 0.4% of Disney. Loeb has previously held positions in Disney's stock over the years before selling between 2020 and 2022.
The call for action from Loeb comes as Disney is pushing forward growth of its streaming platform with a new ad-supported Disney+ rolling out in December, prices going up, and a bigger focus on bundle options for consumers.
As Loeb mentions, Disney has considered spinning off the ESPN brand before, a move that will likely see more attention with his public suggestion. ESPN remains one of the top brands in sports and despite discussing moves into the sports betting sector, it hasn’t entered the high growth market. With a large amount of exclusive sports media rights, ESPN could further expand in the direct-to-consumer sector with more live sports streaming options, a move Chapek has previously discussed.
Chapek has seen Disney shares fall since taking over as CEO on Feb. 25, 2020. Shares of Disney opened for trading on Feb. 25, 2020 at $133.75. While shares of Disney hit all-time highs and topped the $200 level in March 2021, shares are now trading below the level they were when Chapek took over.
Former CEO Bob Iger was loved by investors, turning in a 383% increase for Disney shares, an annual return of 25.5%. Calls to replace Chapek were ignored, with the Board of Directors extending his contract.
Pressure from Loeb and investors could see Chapek needing to pursue a new direction for the company and to focus on priorities outside of just growth of Disney+.
DIS Price Action: Disney shares are up 3% to $124.74 on Monday, compared to a 52-week trading range of $90.23 to $160.32.
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