By Senad Karaahmetovic
Wells Fargo analysts believe the old/new CEO of Walt Disney (NYSE:DIS) Bob Iger will focus on content and cost rationalization in the near term. However, it seems unlikely that Iger’s return will only focus on cutting costs, a process initiated by former CEO Bob Chapek, the analysts write in a client note.
Instead, Iger has returned “to make big changes.” The analysts argue that Iger’s long-term vision may require portfolio reshaping.
“Recall that Iger built DIS into what it is today: a franchise IP leader with global scale. ESPN, traditionally the cash cow, is neither owned-IP nor global the way the rest of DIS is. With linear and sports trends diverging from core IP, we think severing the company is increasingly logical,” they said.
On why spinning ESPN and ABC makes sense for Iger and Disney, the analysts further add:
“We think investors are increasingly put-off by trying to determine how fast Linear Networks—most of which is ESPN/ABC—is declining as DTC profits improve. The seesaw creates a constant headache. Spinning ESPN/ABC provides price discovery for the asset at a FOXA-esque multiple of 6-7x EV/EBITDA, and then lets remaining DIS be more of a pureplay on global IP and streaming.”
However, before Disney would be able to spin ESPN and ABC, it must take a couple of initiatives.
“First, we think ESPN would go a la carte in streaming as that band-aid is long overdue to be ripped off in a world of accelerating cord cutting. That puts pressure on ESPN/ABC's linear cash flows, and DIS's non-ESPN/ ABC linear networks (which are high margin). Second, DIS needs to work hard on cost rationalization to ease the burden of losing ESPN/ABC's earnings and cash. Third, DIS might consider a Hulu sale to shore up the balance sheet and assuage fears from debt rating agencies,” the analysts added.
If this is the way forward for Disney, the company could then focus on its IP strategy while ESPN can look at ways how to best monetize sports, which Wells Fargo analysts believe is “increasingly tricky.”
Bottom line, they argue that ESPN inside of Disney is “a portfolio with less and less logical connection as time goes.” The analysts believe this scenario is “reasonably probable” for late 2023.
They reiterated an Overweight rating on DIS stock and a $125 per share price target.