Walt Disney: “Disney Media SpinCo”

Walt Disney (NYSE: DIS)

Events: “Disney Media SpinCo”

August 11, 2017


SUMMARY INFO

  • Recent PPS: $103
  • FD Shares Out: 1,572 million
  • Market Cap: $161,619
  • Net Debt: $17,851
  • Enterprise: $179,767

DISCUSSION

This is a super short, choppy post; and I will have more expansive thoughts on DIS specifically and Media generally in the coming weeks. But in short, DIS’s move to go direct-to-consumer, while milking its linear cash cow, is a game-changer. (Similar to the DISCK/SNI deal, but bigger.) IMO, the market is likely to begin to view DIS’s Media Networks (aka: “Disney Media SpinCo”) 2018 estimated $2.91 per share earnings power in a “growthy” light, perhaps re-rating it to upwards of 20x. The problem for the stock at this level is that at fair value, “Core Disney” – i.e. Parks, Studios and Consumer – comprises approximately 62% of the current stock price. So if Media Networks was to re-rate to 20x, the return to the total stock price would be less than 20%. As such, I would not be surprised to see more aggressive corporate action to highlight fair value.

In a May 2017 interview with the Financial Times, John Malone had the following to say about DIS (quoting the article; my emphasis):

“What would he do with ESPN if he were Bob Iger, Disney’s chief executive? He says Disney should separate its “linear” US video businesses — ESPN and the ABC broadcast network — from its higher-growth global businesses, such as its movie studio, theme parks and consumer products operations. The separated ESPN-ABC ‘would have huge free cash flow. It would probably be more valued by private equity than by the public [markets]. It might be highly valued by somebody whose focus is entirely the US marketplace‘.”

Who am I to question Malone, but I believe a break-up of the Company would be far more shareholder-friendly. “Core Disney” is highly synergistic, with the Disney brand the center of the virtuous cycle of movies, parks, and consumer products. Media Networks could be spun off quite cleanly; and given DIS’s low leverage profile, it could be spun with no debt. As discussed the other day with regard to DISCK/SNI “pulling an Adobe”, Media Networks could do something similar by milking its linear television cash cow and utilizing its pro forma balance sheet capacity to heavily invest in becoming the Global Netflix of Sports.

In a market that is paying a premium for steady cash flow and growth, I believe both pieces of DIS would be valued quite highly by the market. Additionally, levering up Core Disney to 4x (from 2.05x currently, if all DIS net debt is assigned to it) would yield a special dividend of almost $11 per share.

DIS Analysis August 2017

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Question from the DIS Call

Again, very choppy thoughts here, but three thoughts/questions in response to the DIS conference call:

  1. How is Netflix not toast, valuation-wise?
    • It’s a crappy content toilet + fledgling original content studio…
  2. This entire shift to DTC is highlighting the need for content production
    • So would Amazon make a bid for Viacom, for example, in order to bring well-established brands and production in-house?
  3. DIS likely just turned itself into THE premier global content company
    • As such, with the right “coaching” of the market, “Disney Media SpinCo” could garner a seemingly irrational P/E multiple
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