Disney Takes Crucial First Step Toward More Lucrative Future
The Walt Disney Company has remained in flux for the body of a year now.
Ever since Bob Iger’s shocking return last November, we’ve all watched and wondered how Disney’s CEO will smooth over Bob Chapek’s mistakes.
In recent months, Wall Street and Hollywood alike have watched with intense curiosity, waiting for the first domino to fall.
Now, that has finally happened with a Disney acquisition. Yes, Disney has taken the first crucial step toward its digital future.
Let’s talk about what just happened, and what’s yet to come.
Disney Acquires Hulu
Let’s start with the headline of the week. Yes, any time a business spends $8.61 billion on something, it should be a headline.
In Disney’s case, it has completed a transaction that began in 2019.
When Disney swallowed Fox’s assets, Bob Iger eyed Hulu as one of its primary assets.
Fox had owned one-third of the ascending streaming service.
Once WarnerMedia sold its 10 percent stake in April 2019, Disney suddenly owned two-thirds and a controlling interest.
At the time, Comcast agreed to sell its one-third share of Hulu in 2024.
Comcast executives believed at the time that Disney would grow the asset enough that Hulu would possess a greater value after five years.
Has that expectation proven accurate? That answer depends entirely on whom you believe.
Recently, Comcast has used the rare industry term, “kingmaker asset” to describe Hulu.
Were executives saying this because they believed it or as a negotiating ploy to force Disney to pay a higher price?
We likely won’t gain an answer for this until several months after the fact.
For now, all we can say with certainty is that the price hasn’t gone down. Contractually, that was never going to happen.
Disney and Comcast agreed to a set minimum value for Hulu, which is $27.5 billion.
That’s actually where the story begins here rather than ends.
Yes, Disney has just agreed to pay Comcast a minimum of $8.61 billion, but the transaction is far from finished.
Mega-Corps Head to Arbitration
How well has Disney handled Hulu? Again, that answer remains open to interpretation.
The pandemic destroyed all previous expectations for Disney’s post-acquisition plans.
Since then, Disney has changed leadership twice, and Hulu has undergone multiple changes, including the surprise defection of Kelly Campbell to Peacock.
Disney’s unexpected financial woes have triggered layoffs and caused morale issues throughout the company.
Still, the number of Hulu subscribers has more than doubled since Disney took full control.
After the first quarter of 2019, 22.8 million customers used the service. As of the third quarter of 2023, the total had expanded to 48.3 million.
Hulu’s average revenue per user started at $12.73 when Disney purchased the company. It’s at $12.39 now, indicating that revenue has largely held.
That’s an impressive feat when a business scales up with double the customers.
More importantly, Disney intends to add a Hulu tile to Disney+ by the end of this year. So, that should happen over the next eight weeks.
Disney presumably wanted to wait until it finalized the Hulu transaction.
Still, we’re moving toward a one-app streaming digital content future, with ESPN+ continuing as a standalone live sports service.
How much is all that worth? Well, Comcast had suggested $45 billion, while Disney maintained that the companies had already set the price at $27.5 billion.
Comcast apparently wanted a check today, while Disney wished to proceed with its streaming plans.
So, the parties have taken an unusual step in determining a price. They’ll settle the matter through arbitration.
Disney Hasn’t Finalized the Price
You likely read headlines this week that Disney will pay Comcast $8.61 billion for Hulu.
Those headlines should have included the phrase, “at least…” I say this because the only thing settled is that the two parties have a deal.
On the first day that Comcast and Disney could agree to a deal, the transaction occurred.
The two corporations had previously advanced the negotiating timeline from 2024 to facilitate a quick deal.
You’re likely wondering why Comcast wouldn’t haggle if it feels Disney should pay $15 billion instead.
That’s how arbitration comes into play. Here’s the essential component in this conversation:
“(If) the value is ultimately determined to be greater than the guaranteed floor value, Disney will pay NBCU its percentage of the difference between the equity fair value and the guaranteed floor value.”
In other words, Disney may still owe Comcast billions more for Hulu.
For the time being, Disney will pay $8.61 billion immediately. The transaction will occur before December 1st.
You can expect Iger and his team to provide an update during next week’s fiscal earnings report.
Checks for $8.61 billion tend to stick out on a balance sheet.
How Much Will Disney Pay?
Deadline says what I’ve been thinking all along. Here’s the quote: “(The two) parties (will) conduct a fair market value analysis that likely will see the final price rise.”
Disney and Comcast just came to an agreement that gives the latter company a capital influx now.
Meanwhile, Disney divides its financial outlay into multiple payments, which is helpful with such large transactions.
At some point over the next two months, Disney’s arbiter and Comcast’s arbiter will publish their evaluations of Hulu’s worth.
Should those numbers diverge greatly – and they probably will – a third arbiter will enter the debate as the final determinant.
When that happens, that third-party entity will name Hulu’s actual value as an asset. And yes, that number could feasibly be $45 billion.
I’d expect a total in the low $30s, leading to Disney paying another $1.5-$2 billion at some point in 2024. That’s pure conjecture, though.
The point is more that Disney and Comcast found a way to kick the can down the road, avoid a public squabble, AND solve their mutual interests.
Comcast earns a quick bit of cash, which it might use for NBA television rights or a 2024 asset like Warner Bros. Discovery/Paramount.
Disney avoids paying an excessive amount out of pocket right now and can proceed with Hulu integration on Disney+.
This is the rarest of rare win/win deals on Wall Street.
What Happens Next?
As for what happens next, remember that this is just the first domino for Disney as Iger plots a digital future.
At some point soon, Disney will likely sell most or all of Star India.
Similarly, Disney’s linear assets could go as well. Bidders like Byron Allen and Nexstar would happily pay upwards of $10 billion for these products.
Yes, that’s more than Disney has paid in the short term for Hulu, which is the underlying point here.
Iger has subdivided his company’s assets into several folders. The groups that lack digital growth potential look like the outliers.
Iger could and probably should sell those assets and use the cash to secure Disney’s ascending digital content profile.
No matter how anyone attempts to frame the narrative, this isn’t a fire sale by any stretch.
Instead, Iger is methodically evaluating the board and attempting the next quarter-century of media consumption, just as Michael Eisner had in 1995.
Right now, the primary question mark concerns ESPN. Will Disney sell a small chunk, the entire entity, or spin it off into a new entity?
The status quo remains a possibility as well. So, that’s the big mystery of the moment now that Disney has resolved the Hulu debate.
Sadly, we apparently won’t get the fantasy trade I’d desired, though.
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Feature Photo: Hulu