Expert opinions differ: Should NYSE stock Disney be split into two separate corporations?

• Disney had some successes in 2019
• Some experts advise splitting up into two independent groups
• BoA analyst Jessica Reif Ehrlich, on the other hand, does not believe that a clean break is possible

2019: Disney’s year of success

The well-known media group Disney recorded the year 2019 as a complete success. Just one day after the launch of its in-house streaming service, Disney+ had over 10 million subscribers, as reported by yahoo finance. Also this year, the company completed its $71 billion acquisition of Fox’s entertainment division, opened two Star Wars theme parks and released the second-biggest-grossing film in cinema history, Avengers: Endgame. Taken together, these notable achievements show just how strong Disney really is as an entertainment giant. In this way, the group manages to market its intellectual property everywhere, from cinemas to theme parks to streaming services directly in the consumer’s home.

Split Disney into two separate companies?

However, the interim euphoria seems to have evaporated: Four years later, the company’s parking business is in decline, as is the company’s linear TV division and subscribers to the flagship streaming service Disney+. Not to mention that the media giant seems to be lagging behind its competitors at the box office. This raises the question for some experts as to how sensible it actually is to combine all of the company’s assets under one roof. Even Disney CEO Bob Iger has said that the company is simply too big, according to yahoo finance. And on Wall Street, the opinion is growing that the group should be better split up.

“Given your reflections on the future of Disney, would it not make sense to create two Disney companies: one focused on the parks, Disney+ and the studio IP that powers this flywheel, and one that that takes care of everything else, so why not make a clean cut?”, for example, Michael Nathanson, an analyst at Moffett Nathanson, asked the CEO during a recent conference call. Nathanson later clarified that by “everything else” he meant Disney’s linear networks, ESPN+, Hulu SVOD, Hulu Live TV, and Disney+ Hotstar. When asked, Iger stated that he would not comment on the future structure of the company or the composition of assets. “As I’ve said before, we are evaluating strategic options for both ESPN and the linear networks, while of course addressing any challenges these companies face.”

Given the decline in linear TV, Iger announced last month that it would conduct a comprehensive review of Disney’s traditional TV assets, pointing to possible strategic options, including selling it. Iger acknowledged that the current distribution model no longer works. He explained that Disney’s linear TV operations, including ABC, FX, Freeform and National Geographic, may no longer be central to the strategy. He reaffirmed this idea at the balance sheet press conference and named three main areas – film studios, amusement parks and streaming – as drivers for future growth and value creation over the next five years.

However, fully migrating a network to streaming is seen as problematic by analysts and media watchers, mainly because of the high cost of sports rights and the need for consumers to pay for an additional streaming service rather than receiving sports via the cable package. In addition, sales of linear networks are difficult given the long-term decline of linear television networks and the growing trend towards cable dismantling.

“There is no such thing as a clean break”

However, breaking up the company would give Disney a chance to reduce its debt, eliminate loss-makers and provide clearer direction for its future in a fragmented media landscape. So why not, as Nathanson suggested, make a clean cut? Bank of America analyst Jessica Reif Ehrlich told yahoo finance, “There is no such thing as a clean break.” This is because Disney’s assets feed off each other to fuel the company, with the studios’ intellectual property powering the parks while the linear networks provide the cash that allows Disney to continue investing in growth areas like streaming. Also, ESPN’s value is heavily tied to ABC due to its massive reach on television, although ABC is part of the linear business that Iger may want to get rid of. “I think it was pretty clear that Disney wanted to own a majority of ESPN. How can you do that without also owning ABC and the networks? That’s the part I’m having a lot of trouble with,” explains the analyst. Instead of splitting up, Ehrlich therefore proposes using the brands to create value. As an example, she cited ESPN’s $2 billion sports betting deal with Penn Entertainment: “The intellectual property that they control has a lot of intrinsic value.” Ehrlich doesn’t think a divestment will be enough to solve Disney’s myriad problems, although there are arguments that can be made on both sides. “I’m not one of those people who say Disney really needs to split up. However, I think – and Bob Iger made that very clear – all the options are on the table,” she explains.

Nathanson recently lowered his price target on the stock from $120 to $115, but argued that the value isn’t fully realized within the company’s current structure. “Considering that Disney is in the process of evaluating all options regarding its future asset mix, we believe there is a clear case that Disney’s assets are worth significantly more than its current enterprise value in any scenario ‘ Nathanson wrote in a note to customers after Disney released its latest findings.

Disney stock has received 20 ratings from Wall Street analysts over the past three months, according to TipRanks. The average target price is $110.71. 13 times “buy”, 5 times “hold” and 2 times “sell” results in a moderate buy recommendation overall.

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