Despite the urging of activist investor Daniel Loeb, analysts tell they’re not sold on the idea
“I don’t see too many positives of spinning it off,”Dale Welaufer is the CEO of Charlotte Lane Capital. “Theoretically, there are some big holes in Loeb’s argument.”
Why Disney needs ESPN financially
A media conglomerate is currently able to monetize the assets in both content creation as well as distribution. This makes them the world’s leading sports company. Disney, in other words can help ESPN reach the largest audience possible while also providing the most extensive overall reach.
Disney’s ownership of ABC helps the cable network contribute to the hefty cost of sports broadcast rights and provides more potential eyeballs (ABC will simulcast “Monday Night Football”For example, ESPN will be broadcasting the NFL season. Disney’s support systems and resources are a boon for ESPN — and TV networks/streamers should This is what you want for your company’s safety net.
Additionally, ESPN is a profitable center that the conglomerate urgently needs. Over the past nine months, Disney has lost $3 billion in cash. This includes a $1.1 billion loss on its direct to consumer segment. These streaming losses are expected to spike this year. It also needs to be able pay down approximately $50 billion in debt each year and $1.8 billion in interest. That’s some suboptimal math right there.
“Disney needs capital — why would you deprive it of a cash generative force?”Wetlaufer spoke of ESPN.
The company’s linear networks segment, of which ESPN is a main contributor, generated an impressive $7.2 billion in revenue in the most recent quarter. Linear ESPN makes about $10Each month, per subscriber. 76 millionU.S. homes to close last year. ESPN+’s average revenue per user (ARPU) is rising year over year — most recently it saw a 2% increase. ESPN makes a lot of money, that’s for sure!
“It’s really hard to pay interest when Disney+ is losing all this money on the side,” David Offenberg, associate professor of entertainment finance at LMU’s College of Business Administration, told . The company “needs something to create cash flow for them to pay off interest, debt and support Disney+. ESPN is a perfect fit for that.”
Loeb is concerned over the length and longevity of ESPN. 8 Million subscribers in 2021 and has seen its customer base steadily shrink over the last decade much like all of pay TV, then why wouldn’t the market share the same concerns? Turning the sports network into a freestanding company would likely increase the network’s overhead expenses — and lead to a complicated negotiation to unravel sports broadcast rights currently shared with ABC.
Yes, cable TV has fallen. That is true. Its death, however, has been greatly exaggerated overall. “I suspect ESPN is going to continue making positive cash flow for Disney for many years to come,” Offenberg said. “It will dwindle as the cable subscribers decline, but its demise isn’t coming anytime soon.”
ESPN boosts Disney’s streaming power
Analysts also believe that Disney should keep ESPN in house because of the value it brings to the Disney streaming bundle which includes Hulu, Disney+ and ESPN+. Any potential spinoff should maintain that business relationship in order to maximize value.
According to Parks Associates consumer research for the first quarter 2022, 52% have at least one Disney streaming video in their homes. This figure is based on a survey by Parks Associates. “ESPN+ is the most popular and valuable sports streaming service in the [over-the-top] market,”Eric Sorensen is a Parks Associates senior analyst.
Zooming in, 16% have ESPN+. This is double the penetration of NBA.TV (8%), according to Parks Associates.
Loeb noted in his letter that Disney’s family-friendly brand may be preventing ESPN from embracing the legalization of sports gambling as a lucrative new revenue generator. Disney has already embraced sports gambling as a lucrative new revenue source. Nearly 5% of the stakeDraftKings is a sports-betting giant. Last summer, DraftKings explored licensing the ESPN brand for DraftKings Entertainment and Caesars Entertainment in deals that could be worth as high as $2.5 billion. $3 billion — although no agreement has been announced.
The legalized sports gambling market will only grow in value with major states like Florida, Texas, and California expected to follow New York and New Jersey’s footsteps in the coming years.
“If Disney had any reason to part ways with ESPN as Daniel Loeb suggests, it would be to pursue other business interests,”Sorenson stated. “However, when wagering becomes legalized in all 50 states and it gets tied to the worldwide leader in sports, it has the potential to be a cash cow for ESPN and the Mouse.”
The only way a spin off can work is if Disney loads up ESPN with its debt, similar to what AT&T did with WarnerMedia, and then gets a one-time cash payment in return. But then the question becomes how much debt can ESPN handle before it’s no longer a viable spinoff? The juice just isn’t worth the squeeze, especially since ESPN brings both free cash flow and streaming value to a company that’s banking on both.
