coldsnowstorm
Thesis
About 2 years ago Daniel Loeb’s Third Point pushed an activist campaign that persuaded The Walt Disney Company (NYSE:DIS) to cut its dividend and spend more aggressively on streaming. This arguably has been a very successful strategy. Disney is now the biggest streaming competitor to Netflix (NFLX), adding about 14.4 million new subscribers in the recently announced June 2022 quarter alone. And most notably, cumulatively Disney Plus, Hulu and ESPN have now more subscribers than Netflix. Reportedly, Third Point exited its equity stake in Disney earlier this year. But now the activist investor is back with a new set of wishes, which I personally believe make perfect sense for shareholders.
Disney is still down more than 30% from ATH and has underperformed the market YTD.
Seeking Alpha
Daniel Loeb’s Letter
On August 15th, Daniel Loeb wrote a letter addressed to Disney’s CEO Bob Chapek:
… This quarter’s results are an important proof point that Disney’s complex transformation is succeeding and our confidence in Disney’s current trajectory is such that we have, in recent weeks, repurchased a significant stake in the Company.
He also added that
… the Company will likely require additional strategic, capital allocation, and governance changes to ensure its success.
To support value generation for shareholders, Daniel Loeb highlighted 4 key strategic demands:
4 Key Strategy Demands
1. Cost Cutting
Disney’s costs are among the highest in the industry, and we believe Disney significantly underearns relative to its potential.
My take: Of course, this makes perfect sense. As an investor, I like cost-cutting initiatives that stimulate higher free cash flow levels that can be distributed to investors, or reinvested for strategic business decisions.
2. Acquire 100% of Hulu
We believe that integrating Hulu directly into the Disney+ DTC platform will provide significant cost and revenue synergies … We urge the Company to make every attempt to acquire Comcast’s remaining minority stake prior to the contractual deadline in early 2024.
My take: I agree with the thesis to buy 100% of Hulu. Ever since Disney has acquired operational control of Hulu in 2019, Comcast (CMCSA) has retained a 33% equity stake. Arguably, this has impacted the streaming service international expansion and likely guided the decision to operate Hulu as a stand-alone service in addition to Disney plus.
3. Dividend Policy
We urge the Company to preserve this policy and use free cash flow to pay down debt, repurchase shares, or organically reinvest in the business.
My take: I am not a dividend investor, so I side with Daniel Loeb. I prefer a great company reinvests its cash-flows in the business. Moreover, dividends are only the “distribution” of value, and have nothing to do with value generation.
4. Spin-out ESPN
We believe that a strong case can be made that the ESPN business should be spun off to shareholders with an appropriate debt load that will alleviate leverage at the parent Company.
My take: About this one I am not so sure, to be honest. Investors do not have enough information to assess this proposal (e.g., what are the economics of this service, including debt allocation). Moreover, selling ESPN would significantly impact Disney’s opportunity to bundle different services, an advantage that Netflix cannot match. Accordingly, I remain neutral on this demand from Daniel Loeb.
So far, Disney has not responded very positively to Daniel Loeb’s demands, but reaffirmed ‘confidence’ in Disney’s “independent” management team. If it comes to a more aggressive “negotiation,” I will vote my shares with Third Point.
Conclusion
As I have previously outlined in my article “Disney: Buy This Dip,” I am positive on Disney stock. And after Daniel Loeb’s equity engagement, I now am confident to double down on my bullish view. In my opinion, Daniel Loeb’s demands definitely make sense for investors. First and most notably, although highly fashionable during Covid-19, streaming has now lost a lot of its “growth” luster. And accordingly, a focus on profitability should be viewed favorably. Concluding, while I have never doubted that Disney will reach new record heights, I take the view that with Loeb’s engagement, the timeline will likely be accelerated.
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