How Iger can do what Chapek wouldn’t: ESPN Spin Off

Bob Iger didn’t return to take over as CEO of Disney just for fun, and analysts believe he has a clear “game plan” for 2023 – the main one being spin-off from ESPN.

Wells Fargo analysts wrote that the argument that Disney is finally parting ways with the sports network is becoming “increasingly logical.” Even if it requires some balance sheet shaping, Iger’s return makes the move much more likely, they predict.

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“We believe Bob Iger has returned to DIS with a game plan to both organically improve operations and shape the portfolio toward a new future,” the analysts wrote. “We believe that with the return of Bob Iger as CEO of DIS, the potential for strategic change is greater than ever. Iger’s legacy is dealing, after all.

Analysts and investors have been flirting with the possibility of Disney parting ways with ESPN for some time, and those discussions intensified after activist investor Daniel Loeb argued for the move. After talking with the Disney brass, Loeb ends up backward from that position and even got a friendly face on the Disney set. But that was when Bob Chapek was still in charge, and Iger might see it differently.

Analysts’ arguments in favor of the move are that while the sport is making a lot of money for Disney, the company’s linear business is shrinking, its streaming business is growing, and anything Disney offers direct to the consumer is intellectual property that the company owns and may even relate to parks and other facets of the business. The sport and the licensing deals that ESPN has with the major leagues are not that, and even “create a constant jigsaw puzzle of risk versus benefit”.

“In short, DIS is a franchised IP company with a flywheel of monetization. Sports is a distribution business where the value goes to the leagues. We believe there is very little reason for DIS and ESPN to stay. together given the evolution of media consumption,” the memo reads.

This would allow Disney to focus solely on its own IP and streaming ambitions while allowing ESPN, as a standalone entity, to figure out how to build its own major sports streaming product. Figuring out how to do this, what analysts call a “ripping the bandage” event that will cannibalize the linear side of the business, is something that would take a lot of time and attention from Disney management to do right. , so it’s no wonder they were hesitant to “take the plunge”.

Because ESPN isn’t entirely free cash flow positive if it were to be shot, analysts believe one option Disney should explore to make it work would even involve Disney selling Hulu to Comcast. Disney owns two-thirds of Hulu and needs to decide the remaining third by 2024. If it were to sell Hulu, it could mean another $18 billion in the future and could be just what it needs to complete the ESPN spin.

“Bob Iger is known for these acquisitions [sic], and we think his return to DIS marks a willingness to make bigger decisions. ESPN has been an ongoing issue with more problems than solutions, and we think spinning + DTC is much stronger,” the note concludes. “The connections between ESPN/ABC and DIS content are thinning, so we view this transaction as the best way forward.”

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