the stock’s post-earnings run continued this week after Dan Loeb’s third point sent a letter to CEO Bob Chapek revealing another big pile and outlining suggestions for the entertainment giant. While a Citi Research analyst sees merit in most of Loeb’s suggestions, he doesn’t think ESPN should be split.
In his letter to Chapek, Loeb reiterated his view that Disney should keep its dividend suspended so that it can allocate free cash flow to reinvesting in the business, paying down debt or buying back stock. He also suggested cutting costs, integrating Hulu directly into Disney+’s direct-to-consumer platform, and revamping the company’s board. He advocated exploring an ESPN spinoff, as it could work for both companies, and the companies can maintain most of their current arrangements through contractual agreements.
Jason Bazinet, the Citi analyst who has a buy rating and target price of $160 on Disney stock, isn’t so sure. Disney stock rose 1.3% to $125.88 in Tuesday afternoon trading.
“While an ESPN rotation may drive the stock higher in the short term, we believe retaining ownership has several long-term benefits,” Bazinet writes.
Among the benefits is keeping ESPN off the table for streaming competitors like
(AAPL) to acquire it, which would dampen the value of Disney’s direct-to-consumer offerings.
“We see sports as a unique facet of Disney’s DTC offering, especially compared to incumbent DTC businesses like
; an ESPN rotation would eliminate that potential regrouping advantage,” Bazinet added. “If Disney chooses to work with the new ESPN entity via contractual agreements to consolidate, there is always the risk that the new ESPN entity will choose to enter into non-exclusive agreements with a wide range of DTC rivals; we don’t think it would benefit Disney shareholders.
Bazinet also believes the sport helps Disney broaden its appeal to advertisers who want to cross-sell its streaming brands and linear TV brands.
“In short, we believe Disney’s primary goal should be to use all assets and brands at its disposal to come as close as possible to replicating the economics of the linear television business model,” wrote Bazinet. “Structural separation from any single brand, including ESPN, would be orthogonal to this larger long-term goal.”
Bazinet called other suggestions of cutting costs, postponing the return of the dividend and obtaining 100% ownership of Hulu as rational. Without knowing who wants Third Point on the board, he has no opinion on Loeb’s suggestion of a reshuffle.
“When it comes to cutting costs, we have rarely come across a company that doesn’t have the wiggle room to cut costs,” he wrote. “And we believe any cost initiative would be viewed favorably by investors as long as it doesn’t impede the company’s long-term growth prospects.”
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