Disney Analyst: Spinning Off ESPN, ABC Is “Best Path Forward”

Disney Analyst: Spinning Off ESPN, ABC Is “Best Path Forward”

“We think Bob Iger is returning to Disney to make big changes. Spinning [off] ESPN/ABC is the best path forward, and we see it as a reasonably probable late-’23 event.” Wells Fargo analyst Steven Cahall opened a Tuesday report on The Walt Disney Co., led again by Iger as CEO, with a big call that is certain to cause debate.

The analyst, who has an “overweight” rating with a $125 price target on Disney, making it a “signature pick” of his firm, argued that it was “time for change.” Disney stock was trading at 86.14 a share Tuesday, down 45 percent year-to-date.

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In the near term, Cahall expects Iger and his team to focus on content and cost rationalization. “However, over the longer term, we expect a deeper think on portfolio reshaping. Recall that Iger built Disney 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 Disney is. With linear and sports trends diverging from core IP, we think severing the company is increasingly logical.”

Separating ESPN and ABC “would leave remaining Disney as an attractive pureplay IP company,” the Wells Fargo expert emphasized. “We also think investors are increasingly put off by trying to determine how fast linear networks — most of which is ESPN/ABC — is declining as direct-to-consumer (DTC) profits improve. The seesaw creates a constant headache. Spinning ESPN/ABC provides price discovery for the asset at a Fox-esque multiple of 6-7 times enterprise value/earnings before interest, taxes, depreciation and amortization (EBITDA), and then lets remaining Disney be more of a pureplay on global IP and streaming.”

Cahall noted, though, that “if Disney sees the world the way we do, then it has work to do in prep of a spin.” He then mentioned potential initiatives and moves that could be in store. “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 Disney’s non-ESPN/ABC linear networks (which are high margin). Second, Disney needs to work hard on cost rationalization to ease the burden of losing ESPN/ABC’s earnings and cash. Third, Disney might consider a Hulu sale to shore up the balance sheet and assuage fears from debt rating agencies.”

Cahall adds that he sees a separation of ESPN and ABC from the rest of the company as having various benefits. “Disney can move forward with an IP strategy, while ESPN can determine how best to price and monetize sports, which is increasingly tricky. Investors can build their own portfolios, and we think ESPN inside of Disney is a portfolio with less and less logical connection as time goes by. As such, to us, it’s a reasonably probable event for late 2023. We like Disney for its optionality and self-help.”