The Walt Disney Co. may be ready to spin off ESPN and ABC.
That is the opinion of Wells Fargo analyst Steven Cahall in a research note on the Burbank entertainment and media giant published last month.
“(Disney) will begin the spin-off process for ESPN and ABC including launching ESPN in streaming a la carte,” Cahall wrote. “Cost rationalization and balance sheet options are critical to reaching this outcome. The result is a better-off remaining (Disney).”
The future of the sports network at Disney “has been a perpetual talking point among investors for years and picked up steam this year after Third Point’s Dan Loeb sent a letter to the company (in August) urging an ESPN spin-off,” according to a story at Yahoo Finance.
Third Point, based in New York, is a major investor in Disney. Loeb backed off on his request in September after then-Chief Executive Bob Chapek said in an interview with the Financial Times that the company had plans for ESPN.
“We have a better understanding of ESPN’s potential as a standalone business and another vertical for Disney to reach a global audience to generate ad and subscriber revenues,” Loeb said in a Tweet from Sept. 11.
Chapek has since been replaced as Disney’s head by Bob Iger, who was brought back to lead the company by the board of directors at the end of November. Iger had served as chief executive of Disney for almost 15 years until February 2020.
“We think Bob Iger is returning to Disney to make big changes,” Cahall wrote in the research note. “Spinning ESPN/ABC is the best path forward and we see it as a reasonably probable late-’23 event.”
Jason Bazinet, managing director at Citi, told Yahoo Finance Live on Nov. 21 that he was against spinning off ESPN, calling such a move “the dumbest thing ever.”
Bazinet went on to explain ESPN has the potential to be a much bigger global business, especially if Disney chooses to leverage the internet for distribution. He also noted the network generates the bulk of Disney’s cash flow, which will ultimately fund its pivot to direct-to-consumer and help offset accelerating streaming losses, according to the Yahoo Finance story.
“What Disney is embarking upon with a direct-to-consumer (DTC) business is very much like a cable company or a telecom company,” Bazinet said, stressing that DTC bridges the gap between the consumer and sports rights, according to Yahoo Finance. “They should not spin it off.”
Still, investors are eager to see some type of change at the company amid steep streaming losses and a sinking stock price, the Yahoo Finance story continued.
In its most recent fiscal year, Disney’s operating income for its Linear Networks segment — which includes ESPN — totaled $8.52 billion. Losses for its direct-to-consumer unit, which includes Disney+, Hulu, and ESPN+, totaled $4 billion for the year, the story reported.
The Dec. 20 predictions come as industry watchers expect more media merger activity in 2023, the Yahoo Finance story said.
“It’s a pretty good inflection point,” Jon Christian, executive vice president of digital media supply chain at Qvest, a media and entertainment-focused consulting company based in Cologne, Germany, told Yahoo Finance. “The (streaming) game has changed. It used to be just subscribers at all cost … but now [investors] need these services to be profitable.”