Disney (DIS) has some serious decisions to make now that Bob Iger has returned as CEO.
One question includes the murky future of ESPN and whether or not the media giant should consider spinning off the popular sports network — a suggestion previously made by Third Point’s Dan Loeb. Loeb argued ESPN would have greater flexibility to pursue business initiatives, such as sports betting, if it was not part of Disney.
“We’re very much against spinning off ESPN… that’s the dumbest thing ever,” Jason Bazinet, managing director at Citi, told Yahoo Finance Live on Monday.
Bazinet went on to explain ESPN has the potential to be a much bigger global business, especially if Disney chooses to leverage the internet for distribution. He also noted the network generates the bulk of Disney’s cash flow, which will ultimately fund its pivot to direct-to-consumer and help offset accelerating streaming losses.
“What Disney is embarking upon with a direct-to-consumer business is very much like a cable company or a telecom company,” he continued, stressing that DTC bridges the gap between the consumer and sports rights. “They should not spin it off.”
In its most recent fiscal year, Disney’s operating income for its Linear Networks segment — which includes ESPN — totaled $8.52 billion. Losses for its DTC unit, which includes Disney+, Hulu, and ESPN+, totaled $4 billion for the year.
The streaming division lost a combined $1.5 billion in the company’s latest quarter, missing expectations and sending shares down more than 10% following the results. Shortly after these results, Disney established “a cost structure taskforce” to help the streaming division reach its profitability targets.
In an internal memo obtained by Yahoo Finance earlier this month, Disney warned hiring freezes and layoffs were all likely consequences as it worked to rein in spending.
Third Point, which purchased “a significant stake” in Disney following the media giant’s earnings released back in August, is not the only activist fund to pressure the company.
Nelson Peltz’s Trian Fund Management acquired an $800 million stake in Disney earlier this month, according to The Wall Street Journal. The hedge fund, which disapproved of Iger’s surprise return, will likely push for additional cost cuts and changes to the board, the report noted.
Trian did not immediately respond to Yahoo Finance’s request for comment.
Disney stock soared on Monday on the news of Iger’s CEO comeback, rising as much as 9% in early trading before paring gains to just over 5% by mid-afternoon.
Wall Street analysts, at first glance, appear optimistic the decision will improve the fortunes for a stock that has lagged the market during Chapek’s tenure.
Since Chapek took over as Disney CEO in late February 2020, Disney shares are down about 19%; the S&P 500 is up around 34% over that same period.
Disney’s board of directors unanimously voted in June to extend Chapek’s contract for another three years, through 2025. At the time, the board noted Chapek’s leadership was essential in helping the company overcome pandemic headwinds.
Nevertheless, his tenure has been riddled in controversy — from political battles and A-list talent problems to controversial reorganizations and the ever-looming shadow of Iger, who has spoken out against some of Chapek’s decisions.
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