Shares of Walt Disney Co. were rising in Monday morning trading after Third Point LLC Chief Executive Daniel Loeb disclosed that he has “repurchased a significant stake” in the company and would seek to work with the media giant’s management team in pursuit of strategic changes.
In a letter to Disney’s
management, Loeb recommended cost cuts, a continued suspension of the company’s dividend, strong efforts to acquire Comcast Corp.’s
minority stake in Hulu, a potential spinoff of the ESPN business, and an “introduction” to new board members who could fill current “gaps in talent and experience.”
Loeb said in his letter that Disney’s latest quarter showed that the company’s “complex transformation is succeeding,” though he said that Disney “will likely require additional strategic, capital allocation, and governance changes to ensure its success.”
In proposing cost cuts, he argued that the company’s “costs are among the highest in the industry,” causing Disney to “significantly [underearn] relative to its potential.” He wants the company to consider expense cuts that could help improve margins and dispose of “excess underperforming assets.”
Disney stopped dividend payouts in 2020 as the onset of COVID-19 disrupted its parks business, and Loeb is urging the company to continue that suspension while using its free-cash flow to buy back shares, pay back debt or invest in organic growth.
He also recommended that the company “make every attempt to acquire Comcast’s remaining minority stake [in Hulu] prior to the contractual deadline in early 2024.” Such a move could provide various benefits to Disney’s streaming business through “significant cost and revenue synergies” that could once again jumpstart domestic growth.
“We believe that it would even be prudent for Disney to pay a modest premium to accelerate the integration but are cognizant that the seller may have an unreasonable price expectation at this time (while noting the seller has already made the decision to prematurely remove their own content from the platform),” Loeb wrote. “We know this is a priority for you and hope there is a deal to be had before Comcast is contractually obligated to do so in about 18 months.”
He further called Disney’s ESPN unit “a great business” with strong cash-generating properties, though he recommended that Disney executives consider a spinoff, which he said could make both companies, as well as customers, better off while creating value for shareholders and allowing the businesses to continue working together through contractual deals.
Such a transaction could enable both Disney and a standalone ESPN to “attract shareholders seeking the respective qualities of each company, allowing the Disney parent multiple to expand as its earnings growth rate increases and the remaining business is no longer haunted by the specter of cord cutting,” per Loeb.
He acknowledged synergies between the two businesses as is but suggested that executives could model a future off of what eBay Inc. and PayPal Holdings Inc. did after splitting in 2015, as the two companies continued their relationship for years through contractual arrangements.
Disney didn’t immediately respond to MarketWatch’s request for comment on the Third Point recommendations.
Shares of Disney have fallen 32% over the past 12 months, as the Dow Jones Industrial Average
has lost 5%.