In August, activist investor Dan Loeb of Third Point, called for entertainment titan Disney to spin off its giant ESPN TV sports network.
His idea was that Disney (DIS) could lower its debt burden through the move. ESPN has paid billions of dollars to college and pro sports leagues for broadcast rights.
Loeb changed his tune in September, saying he now understood how ESPN could boost Disney’s growth.
But Wells Fargo analysts believe that with Bob Iger reinstalled as Disney’s chief executive, a spinoff of ESPN is going to happen.
“We think Bob Iger is returning to Disney to make big changes,” they wrote in a commentary.
“Spinning ESPN and [TV broadcast network] ABC is the best path forward. We see it as a reasonably probable late-2023 event.”
Shutterstock
Intellectual Property Play
The benefit: “splitting would leave the remaining Disney as an attractive pureplay IP [intellectual property] company,” the analysts said.
As for Iger, “we think the CEO and his key reports are focused on content and cost rationalization,” the analysts said. “However, longer-term we expect a deeper think on portfolio reshaping.”
Further, “recall that Iger built Disney into what it is today: a franchise IP leader with global scale,” they said.
“ESPN, traditionally the cash cow, is neither owned-IP nor global the way the rest of Disney is. With linear and sports trends diverging from core IP, we think severing the company is increasingly logical.”
Linear TV means viewers watch a program on the channel it's presented at its scheduled time.
Disney Investment Thesis
Turning to the analysts’ investment thesis for Disney, they rate it as overweight. “Disney now a streaming company first and foremost, as we estimate 332 million subscribers by 2025.” It had 236 million streaming customers as of Oct. 1.
“Disney+ [Disney’s biggest streaming service] is a market-leading product in terms of consumer affinity and profitability, with the core Disney brands driving long-term value in parks and consumer experiences,” the analysts said.
“Over time, we expect Disney’s streaming efforts to converge into a single bundled service, creating a global duopoly with Netflix for bundled content services with massive global scale.”
The company is well equipped for its mission, the analysts said. “Disney has the content, balance sheet and execution track record to deliver our streaming growth thesis,” they said.
“Separately, while traditional businesses including media networks and studio windows are winding down, Disney Parks/Consumer Products is likely to benefit from post-pandemic pent-up demand,” the analysts said.
“Disney is a growth company in attractive markets with the best content, and we expect it to be a favorite for large-cap investors.”
The analysts have a target price of $125 for Disney. It recently traded at $88.
