Wells Fargo analysts wrote that the case for Disney finally spinning off the sports network is becoming “increasingly logical.” Even if it requires some balance sheet shaping, Iger’s return makes the move far more likely, they predict.
“We believe Bob Iger has returned to DIS with a gameplan to both improve operations organically and shape the portfolio towards a new future,” the analysts wrote. “We think with Bob Iger returning as DIS’s CEO the potential for strategic change is greater than ever. Iger’s legacy is transactions, after all.”
Analysts and investors have flirted with the possibility of Disney spinning off ESPN for some time, and those discussions got louder after activist investor Daniel Loeb advocated for the move. After chatting with Disney brass, Loeb eventually backed down from that position and even got a friendly face on the Disney board out of it. But that was when Bob Chapek was still in charge, and Iger might look at it differently.
The analysts’ case for the move is that while sports brings in a lot of money for Disney, the company’s linear business is shrinking, its streaming business is growing, and everything Disney puts out on the direct-to-consumer side is IP that the company owns and can even tie into parks and other facets of the business. Sports and the licensing deals ESPN has with the major leagues aren’t that, and even “creates a constant headache of earnings risk and valuation.”
“In short, DIS is a franchise IP company with a monetization flywheel. Sports is a distribution business where value accrues to leagues. We believe that there is very little reason for DIS and ESPN to remain together given the evolution of media consumption,” the note reads.
Doing this would let Disney focus purely on its own IP and streaming ambitions while allowing ESPN, as a standalone, to figure out how to build its own major sports streaming product. Figuring out how to do that, which the analysts call a “rip the band-aid off” event that will cannibalize the linear side of the business, is something that would require a lot of time and attention from Disney management to get right, so it’s no wonder they’ve been hesitant to “take the plunge.”
Because ESPN is not entirely free-cash-flow positive if it were to be spun, the analysts think one option Disney would need to explore to make it work would even involve Disney selling Hulu to Comcast. Disney owns two-thirds of Hulu and needs to decide on the remaining third by 2024. If it were to sell Hulu, that could mean an extra $18 billion coming in the door and could be just what it needs to complete the ESPN spin.
“Bob Iger is known for this acquisitions [sic], and we think his arrival back at DIS marks a willingness for bigger decisions. ESPN has been a constant issue with more problems than solutions, and we think spinning + DTC puts on much firmer footing,” the note concludes. “The connections between ESPN/ABC and content DIS are thinning, so we see this transaction as the best path forward.”