Dan Loeb can help Disney get with the program

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A float is seen as people attend the "Festival of Fantasy" parade at the Walt Disney World Magic Kingdom theme park in Orlando, Florida, U.S. July 30, 2022.

NEW YORK, Aug 15 (Reuters Breakingviews) - There’s a new character at Walt Disney (DIS.N) that can help it generate more money. Dan Loeb, the decidedly unbashful hedge fund manager who runs Third Point, has taken a nearly $1 billion position in the entertainment empire, after liquidating its former stake earlier this year. His ideas for the company are far from goofy.

The pushy investor sent a letter read more to Disney Chief Executive Bob Chapek on Monday that started by congratulating him. Chapek managed to knock streaming subscribers out of the park last week by disclosing the $222 billion company had as many customers as Netflix (NFLX.O) does, with Disney+, Hulu and ESPN+ totaling 221 million.

Meanwhile, incumbent broadcasters are trying to make the transition from fading television assets – Disney also owns U.S. network ABC – and streaming. To cope with the challenges, Loeb suggests spinning off ESPN to whittle down Disney’s $46 billion in debt. Morgan Stanley estimates the sports network will generate some $4 billion in EBITDA this year. On a multiple of 10 times – higher than rival Fox (FOXA.O) and lower than Ultimate Fighting Championship owner Endeavor (EDR.N) – suggests ESPN is worth about $40 billion.

Loeb is also advocating that Disney consider buying the rest of Hulu’s 33% stake it does not own from Comcast (CMCSA.O). The two companies have an agreement in place to sort out a deal by January 2024 for a minimum total equity value of $27.5 billion. Having full ownership would give Disney leeway to experiment with the more adult-oriented programming, for instance “Only Murders in the Building,” and complement Disney+ offerings from the Marvel and Star Wars franchises.

Streaming bellwether Netflix has been clobbered after losing more than 1 million subscribers during the first half of this year and causing a ripple of schadenfreude across Hollywood. In theory, having a sputtering but cash-generating asset would help offset losses from streaming. Indeed, Disney’s direct-to-consumer division lost $1 billion in the quarter ending July 2, more than three times what it lost a year earlier. But Disney also has a strong theme parks division, which accounted for more than 60% of Disney’s operating income last quarter. That gives Chapek enough slack to cut the cord and make shareholders happy.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

CONTEXT NEWS

Hedge fund firm Third Point has taken nearly a $1 billion stake in Walt Disney, a source familiar with the matter told Breakingviews.

The firm, led by Daniel Loeb, sent a letter on Aug. 15 to Disney Chief Executive Bob Chapek. Loeb is urging the company to spin off sports cable network ESPN, to shake up the board, and to buy the rest of Hulu from Comcast and integrate it with its flagship streaming product, Disney+.

Walt Disney said in a statement that under Chapek the company has delivered a “strong performance,” including record streaming subscriptions.

“Our independent and experienced board has significant expertise in branded, consumer-facing and technology businesses as well as talent-driven enterprises,” the company said. “The board has also benefited from continuous refreshment with an average tenure of four years.”

Editing by Jeffrey Goldfarb and Sharon Lam

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