Disney Could Spin Out ESPN, ABC by End of 2023, Analyst Says - 20th December 2022

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Back in September, former Walt Disney CEO Bob Chapek told investors the company had no interest in selling ESPN. In fact, he seemed keen on the idea of adding wagering to the company’s sports portfolio.

But Chapek has since been ousted, with Bob Iger back in for a second stint as CEO. The change at the top could trigger a significant shift in strategy.

Wells Fargo media analyst Steven Cahall asserted in a research note Tuesday that he thinks Disney (ticker: DIS) could spin off ESPN and ABC as a separate company before the end of 2023, leaving Disney as a “pure play IP company,” generating multiple revenue streams from franchise intellectual properties such as Marvel, Star Wars and Pixar.

“We think Bob Iger is returning to Disney ready to make big changes,” Cahall writes. “In the near term, we think the CEO and his key reports are focused 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.”

Cahall’s point is that Disney doesn’t actually own the underlying content when it comes to sports programming—and sports programming doesn’t travel well internationally. He also thinks that “investors are increasingly put-off” by having to calculate into their financial models how fast the company’s linear-television business is declining, even as the direct-to-consumer streaming business improves.

“The rationale for considering an ESPN spin is not financial engineering, but rather portfolio Improvement,” the analyst adds. “Linear is mostly sports and domestic, while [streaming] is global and leverages owned franchise IP. That IP ties directly into Parks experiences, consumer products and gaming. Sports does not have these ancillary monetization models.” Core Disney, he says, “is a franchise IP company with a monetization flywheel,” while ESPN is “a distribution business where value accrues to leagues.”

Concludes Cahall: “There is very little reason for Disney and ESPN to remain together given the evolution of media consumption.”

That said, the analyst says Disney has some work to do to get ready for a potential spin.

For one thing, Cahall finds that the ESPN/ABC combination accounts for more than 100% of the company’s overall free cash flow. Cahall thinks as a precursor move, ESPN will launch a stand-alone streaming service, a move he considers long overdue in a world of accelerating cord-cutting. He also thinks Disney “needs to work hard on cost rationalization.” And he thinks Disney ought to consider selling its two-thirds stake in streaming service Hulu to Comcast (CMCSA), which owns the other third—Comcast CEO Brian Roberts has made it clear that he’d buy the rest if Disney wants to sell, and they agree to terms.

Selling the Hulu stake, Cahall adds, would “shore up the balance sheet and assuage fears from debt-rating agencies.”

Cahall’s view is that with a split, Disney can focus on an IP strategy, and ESPN can figure out how to price and monetize sports, “which is increasingly tricky.” He asserts that investors can build their own portfolios—and that ESPN inside Disney is a portfolio “with less and less logical connection as time goes by.”

Disney didn’t immediately respond to a request for comment.

Disney stock on Tuesday was 2.2% higher, at $87.70. The stock is down 43% for the year to date.