A Breakup Fairy Tale for Disney

Splitting off the TV networks might make it easier to find Bob Iger's successor.

If the Magic Kingdom wants to find its next ruler, it might help if it weren't quite so sprawling. 

We're talking about Walt Disney Co., the $173 billion entertainment media company led by Bob Iger, 65, whose contract is up in 2018. Iger has overseen a more than quadrupling in Disney's stock price during the decade that he's been CEO, and investors took comfort in knowing the succession plan would likely be a seamless one: Chief Operating Officer Thomas Staggs, a longtime Disney executive, was being groomed to take the throne. But last month came news that the heir apparent was stepping down, leaving apprehensive shareholders to ask, now what? 1  

Damsel In Distress

Ok, not quite distress. Disney's film studios have been on a winning streak. But suddenly, with no clear successor to CEO Bob Iger and troubles at its TV networks, can the stock sustain the momentum?

Source: Bloomberg

Filling Iger's shoes was going to be tough enough as it is, and Tuesday evening's disappointing results from its ESPN and ABC networks certainly didn't help (the stock dropped about 5 percent in after-hours trading). Disney needs someone who can seamlessly continue Iger's legacy of making genius studio acquisitions, while also being able to contend with the weakening television network operations. Which begs the question, should these businesses even be under one roof?  

What the past year has revealed is that the two sides of Disney are diverging in performance and needs. The studio side is crushing it, thanks to Iger's trifecta of smart deals for Pixar, Marvel and Lucasfilm. "Star Wars: The Force Awakens," which Disney released in December, is the highest-grossing movie of all time in the U.S. at more than $936 million and newer features including "Captain America: Civil War," "Zootopia," and "The Jungle Book" are all doing well.

Movie Stars

Disney is behind two of the five highest-grossing films ever: "Star Wars: The Force Awakens" and "Marvel's The Avengers." Here are the U.S. domestic totals:

Source: Box Office Mojo

However, it's the TV networks that generate the majority of Disney's revenue and profit. And, well, profit missed expectations this quarter for the first time in years. 

Inside Disney

Disney's films are what give people a reason to visit its theme parks and buy its merchandise, even if the studios themselves are a relatively small revenue generator. The TV networks are the biggest.

Source: Bloomberg

*Disney's new Shanghai park opens next month.

ESPN, though incredibly valuable, is losing subscribers. Meanwhile, the broadcasting unit (mainly ABC) suffered an 8 percent decrease in operating income alongside what Nielsen estimates to be a 15 percent drop in ABC's ratings this year for viewers aged 18 to 49 years old. 

Disney's acquisition 20 years ago of Capital Cities, the former parent of ABC and ESPN, was one of the smartest moves it ever made (under then-CEO Michael Eisner). But now this division is a drag on Disney, and so it may be time to unwind the merger. Investors have generally praised companies that have simplified their structures by spinning off or selling operations that don't have synergies with the rest of the corporation. There may be some synergies between the networks and Disney's other content, but not much.

It would be a lot easier to find a new chief with the right skill set to take on the studio entertainment, theme parks and consumer products side of things without the added burden of navigating an increasingly challenging and changing pay-TV landscape. (That's unless, of course, you're in the camp that Disney should dish out $70 billion-plus to acquire Netflix and put Reed Hastings in charge of an even more gigantic giant.) 2

If it weren't for Staggs' sudden departure, right now we'd probably be talking about what Iger's next big purchase will be. But the succession uncertainty is compounded by the disappointing results at ESPN and ABC. Now, Disney's next steps might need to be more than just finding a replacement CEO -- it might need to be an all-out strategic review. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. There had been speculation that Iger could stay beyond 2018, but on Tuesday's earnings call he said he has no plans to do so.

  2. Facebook COO Sheryl Sandberg, a Disney board member, is also among the speculated candidates to replace Iger. Read more on that here

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net

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