Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Disney without ESPN? An idea some thought improbable, if not crazy, is now catching on. 

Walt Disney Co. has lost some of its sparkle this year. The shares are headed for their worst annual performance since the U.S. recession in 2008, snapping a four-year rally in which the price had nearly tripled. The reversal has Disney's shareholders uncharacteristically restless, waiting to see how Chairman and CEO Bob Iger -- set to retire in mid-2018 -- is going to respond.

Frozen
Disney shares have disappointed this year:
Source: Bloomberg

Back in May, I wrote that a breakup of Disney may be his answer. Separating ESPN (or the media networks division altogether) could not only help lift the company's sagging valuation, but also make it a little easier to find a successor. Recall that Tom Staggs, the Magic Kingdom's heir apparent, abruptly stepped down as chief operating officer earlier this year. And former CFO Jay Rasulo, the other possible pick, quit in 2015.

Since then, ESPN has continued to weigh on Disney's results as the NFL struggles to keep viewers. A Nielsen report showed that ESPN, ESPN 2 and ESPNU lost more than 600,000 subscribers from October to November.  ESPN's NFL ratings have suffered a 17 percent decline this season, according to Nielsen data as of last week. Separately, Disney's ABC network is faring the worst among the top broadcasters, with ratings down 11 percent for the season as of Nov. 9 versus a year ago.

Last month, billionaire John Malone -- the dealmaker of all media dealmakers -- speculated that Disney may spin off or sell ESPN, along with maybe ABC. He then went so far as to say Apple Inc. may be interested in merging with Disney after the split. The Edge, which analyzes spinoffs, has written about a Disney breakup, too, noting that the media networks and the rest of Disney "lack sufficient synergies and have vastly different outlooks and business model challenges."  

Disney World
Disney would be a much smaller company without the media networks, but it'd have fewer headaches and a better growth outlook, too
Source: Bloomberg

Now, RBC Capital Markets analyst Steven Cahall is jumping on the bandwagon. In a report Monday, Cahall wrote that ESPN "has almost single-handedly de-rated Disney by about 3.5 to 4 turns" of its Ebitda multiple. After the stock got a small pop Monday, Disney was valued at 10.7 times the Ebitda it generated in the past 12 months. That's down from a multiple of nearly 14 about a year ago, according to data compiled by Bloomberg.

The media networks division contributed 43 percent of Disney's $55.6 billion of revenue in the past 12 months and half its operating income. But the unit's cloudier outlook is a drag on the company's valuation, which arguably should be at a premium to other TV and movie entertainment companies instead of a discount:

The ESPN Discount
Because of challenges at ESPN, Disney barely fetches a higher multiple than beleaguered media giant Viacom
Source: Bloomberg

Separating the media assets could mean that Iger stays beyond his contract. It would also leave a more streamlined entity for his successor to run (or for Apple to acquire, if you're in that camp). There also are those who think Disney should buy Netflix Inc. and have Reed Hastings take the helm.

This uncertainty is now overshadowing Iger's success in building up the movie-studio business. His trifecta of smart acquisitions -- Pixar, Marvel, Lucasfilm -- has been a driving force for the company and its shares the during the past decade. And those characters and story lines are what bring visitors to Disney's theme parks and spur merchandise sales. But investors of late have focused more on Disney's negatives.

Will all this talk of a split turn into a self-fulfilling prophesy?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Nielsen said it stood by those figures after the company challenged them.

  2. Hearst Corp. owns 20 percent of ESPN and may need to sign off on any transaction involving the asset.

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