Disney asset sales will advance the media industry

Disney asset sales will advance the media industry
Disney asset sales will advance the media industry

  • Investors might applaud Disney’s decision to consider selling some legacy media businesses, even if the deal price doesn’t break the bank.
  • The sale of historic activities, which have lower growth profiles, is symbolically more important for Disney and its shareholders than the purchase price of the assets.
  • Disney has held preliminary discussions with Nexstar to sell ABC and its local subsidiaries, although no deal is assured.

Bob Iger, CEO of The Walt Disney Company, and Mickey Mouse look on before ringing the opening bell at the New York Stock Exchange (NYSE) on November 27, 2017 in New York.

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Usually, when a person or company sells something, their main motivation is to make as much money as possible.

Disney’s motivation to potentially sell ABC and its subsidiaries, linear cable networks and a minority stake in ESPN is not based on what those assets will fetch in a sale. It’s about signaling to investors that it’s time to stop treating Disney as an old media outlet.

Disney’s market capitalization is approximately $156 billion. The company has about $45 billion in debt. Selling assets can help the entertainment giant reduce its leverage ratio while cushioning continued losses from its streaming business. Disney could also use the money to finance its likely acquisition of Comcast’s minority stake in Hulu.

Still, that’s not the main reason Disney Chief Executive Bob Iger told CNBC in July that he was considering selling media assets — something he has long resisted. Rather, a sale of the ABC and linear cable networks would be a message to the investment community: the era of traditional television is over. Disney is ready for its next chapter.

“Disney almost has a good bank and a bad bank at this point,” Steven Cahall, an analyst at Wells Fargo, said in an interview with CNBC. “Streaming is its future. It’s its most important asset, next to the parks. The linear business is something that Disney has clearly signaled is on the verge of decline. They’re not necessarily looking to protect it. If they can cut some of that, negative growth business off the books and to a better, more logical operator, we think that’s good for the stock.”

Nexstar has held preliminary conversations with Disney to acquire ABC and its owned and operated subsidiaries, Bloomberg reported Thursday. Media mogul Byron Allen has made a preliminary offer to pay $10 billion for ABC and its subsidiaries as well as cable networks FX and National Geographic, according to a source familiar with the matter.

Disney released a statement Thursday saying that “while we are open to considering a variety of strategic options for our linear businesses, at this time, The Walt Disney Company has not made any decisions regarding divestment.” of ABC or any other property and no report thereon. the effect is unfounded.”

The value of broadcast networks and cable has declined significantly since the 1990s and early 2000s, as tens of millions of Americans canceled cable in recent years.

Cahall values ​​ABC and Disney’s eight network affiliates at about $4.5 billion. That’s a far cry from the $19 billion Disney paid for Capital Cities/ABC in 1995 — the deal that brought Iger to the company.

ESPN is valued at about $30 billion, according to Brandon Nispel, an analyst at KeyBanc Capital Markets, “although we view it as a melting iceberg,” he added in a note to clients in September. LightShed analyst Rich Greenfield values ​​ESPN at more than $20 billion.

Disney wants to maintain a majority stake in ESPN, Iger told CNBC. It currently owns 80% of the sports media business and Hearst owns the remaining 20%.

About 10 years ago, analysts valued ESPN at around $50 billion.

Sports center at ESPN headquarters.

The Washington Post | The Washington Post | Getty Images

Disney’s most interesting decision might be deciding what to do with the ABC network. The company can easily sell its eight affiliated stations – located in markets such as Chicago, New York and Los Angeles – without changing the trajectory of the media industry.

But divesting the ABC network would be a bold statement by Disney that it sees no future in the world of cable content distribution.

Selling ABC would be particularly shocking given Iger’s comments to CNBC and on Disney’s most recent earnings conference call that he wants the company to stay in the sports business.

“The sports business stands out and remains a good value proposition,” Iger said last month during Disney’s third-quarter earnings conference call. “We believe in the power of sport and its unique ability to bring together and engage audiences.”

It is clearly useful, at least for the next few years, to maintain a large broadcast network for the major sports leagues. NBCUniversal executives hope that ownership of the NBC network will convince the NBA that it should be included in a new deal for broadcast rights to NBA games. NBC is a free live service and can increase the league’s reach, they plan to argue. Even though the world is transitioning to streaming, millions of Americans still use digital antennas to watch television.

Currently, ESPN and ABC share sports rights. ABC’s sale may trigger certain change-of-control provisions that would require rewriting existing deals with pay-TV operators or leagues, according to people familiar with the typical language around such agreements.

Leaving the network could also hamper ESPN’s ability to strike future sports rights deals. Without ABC ownership, leagues can choose to sell the rights to other companies, further weakening ESPN.

If Iger is true to his word and Disney stays in the sports broadcasting business, the company will have to weigh the negative externalities of losing ABC with the positive gains of showing investors that it is serious about losing ABC. assets in decline.

“Obviously, there is some complexity when it comes to decoupling the linear networks from ESPN, but nothing that we think we can’t deal with if we ultimately had to create a strategic realignment,” Iger said on last month.

If Disney strikes a deal to sell ABC and investors applaud the move, it could also serve as a catalyst for other major traditional media companies to sell their declining assets. NBCUniversal, Paramount Global and Warner Bros. Discovery all have existing broadcast and cable networks in addition to their flagship streaming services.

Disney could become the leader in moving the industry forward.

“We see this as a real bullish sign at Disney.” Cahall said. “There’s a lot going on at Disney right now, between ESPN and the partnerships and divesting some of those things. Disney suddenly feels a little more catalyst rich than it has recently.”

– CNBC’s Lillian Rizzo contributed to this article.

Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.

WATCH: Nexstar could ‘definitely’ take ABC and monetize it very well, says Wells Fargo analyst

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