Dan Loeb’s volte-face on ESPN shines a lightweight on Disney’s woe…

In a letter addressed to Disney chief govt Bob Chapek in mid-August, activist hedge fund supervisor Dan Loeb mentioned a “sturdy case may be made” for the ESPN sports activities community to be spun off from the corporate.

Loeb, identified for waging bruising battles towards the likes of Sony and Sotheby’s, outlined his argument together with a bunch of different suggestions to enhance efficiency at Disney, together with a board “refresh”, taking full management of the Hulu streaming community and cost-cutting measures.

Lower than a month later, nevertheless, the aggressive supervisor of hedge fund Third Level reversed his place on spinning off Disney’s sports activities community after Chapek advised the Monetary Instances that he had a plan to “restore ESPN to its development trajectory”. In a tweet, Loeb mentioned he had come to a “higher understanding of ESPN’s potential as a standalone enterprise”.

Loeb’s message got here as a aid to Disney and ESPN staff, however the episode has shone a lightweight on the deeper issues dealing with the sports activities community — and left traders questioning concerning the particulars of Chapek’s plan to repair them.

“[Chapek] has received to clarify to Wall Road how ESPN could be a good enterprise,” mentioned Wealthy Greenfield, an analyst at LightShed Companions. “Cable networks are only a challenged enterprise. The issue is much less and fewer persons are subscribing to [traditional] TV, and the sports activities prices preserve arising.”

Neither Disney nor Third Level would touch upon the matter, however each emphasised there was cordial dialogue between Loeb and Chapek.

As soon as Disney’s revenue engine due to its commanding share of cable subscribers, a gentle stream of affiliate charges and promoting income, ESPN has suffered within the streaming age.

Its subscriber base has fallen from a peak of 99.4mn in 2011 to a projected 73.6mn by the top of this 12 months — a drop of greater than 25 per cent — based on estimates by S&P International Market Intelligence.

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Dan Loeb’s volte-face on ESPN shines a lightweight on Disney’s woe...

Worse, its well-known cash-spinning capacity is anticipated to shrink dramatically over the subsequent three years, mentioned Scott Robson, senior analysis analyst at S&P International. He estimates money circulation will drop from about $2.5bn in 2021 to $1bn in 2025.

“Everyone is aware of that the . . . cable bundle is deteriorating over time,” Chapek advised a Goldman Sachs convention this week. “It’s nonetheless a big enterprise, very appreciative from a money circulation standpoint for us. However in some unspecified time in the future, we see the writing on the wall the place that is going, and we’re getting ready for that.”

Moreover cord-cutting, ESPN is dealing with escalating prices of rights to broadcast sports activities — pushed partially by streaming providers run by deep-pocketed Apple and Amazon. Disney expects to pay $10.3bn in contractual commitments for sports activities programming this 12 months, and a further $60bn in future commitments.

“These sports activities rights are getting increasingly more costly,” Robson mentioned. “It’s actually going to begin negatively impacting the underside line at ESPN.”

However Chapek advised the FT he believes ESPN can return to its development. Essential to this can be extra aggressive advertising and marketing of ESPN Plus, its sports activities streaming community, as a part of a bundle with its different streaming platforms, Disney Plus and Hulu. ESPN Plus has about 22.8mn subscribers, or almost 10 per cent of Disney’s 221mn streaming subscribers.

Chapek famous the enduring energy of sports activities to draw giant audiences, even in an age of viewers fragmentation. He additionally believes ESPN can grow to be a pressure within the quickly increasing US sports-betting business — a step that earlier generations of Disney leaders would have thought too racy for the family-friendly firm.

Disney acquired a 5 per cent stake in DraftKings, a fantasy sports activities and betting group, in 2019 when it purchased twenty first Century Fox. It additionally has a cope with Caesars Leisure that offers it the unique proper to supply sports activities betting odds to ESPN. Chapek has even floated the concept of launching an ESPN-branded sports activities betting app, although the corporate has not began work on this, insiders say.

In his letter, Loeb mentioned it might be simpler for ESPN to pursue sports activities betting outdoors of Disney. He additionally mentioned a spin-off would assist cut back Disney’s debt, which stood at $46bn on the finish of the newest quarter.

However Loeb’s proposal to spin off ESPN divided Wall Road analysts. Greenfield at LightShed Companions helps the concept, however analysts at MoffettNathanson wrote final month that it might be “financially harmful to divest ESPN”. Not solely are Disney’s revenues reliant on ESPN’s money, they wrote, however traders aren’t eager on a leveraged asset whose major enterprise is cable tv within the period of wire slicing.

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Dan Loeb’s volte-face on ESPN shines a lightweight on Disney’s woe...

Furthermore, latest sports activities rights offers present the ever-appreciating worth of stay occasions. Disney rival Paramount final month greater than doubled the value it would pay Uefa for US rights to broadcast the Champions League, now price $1.5bn over six years.

Apple has reached multibillion-dollar agreements to air Main League Soccer and Main League Baseball, whereas Amazon final 12 months joined the costliest package deal of stay sports activities rights ever bought: the Nationwide Soccer League’s $110bn broadcast phrases over 11 years.

Inside ESPN, executives argue that the community is best served with the advertising and marketing would possibly of the remainder of the Disney firm, which incorporates the ABC broadcast community. They level to the seven-year deal ESPN signed final 12 months with the Nationwide Hockey League permitting it to point out video games on the ESPN cable community, ESPN Plus, the Hulu streaming service and ABC. An identical 12-year plan was signed just lately for the rights to the Wimbledon tennis championships.

Even with the headwinds dealing with its core cable tv enterprise, Chapek mentioned Disney had been “deluged” with curiosity from firms looking for to purchase ESPN or take part a spin-off after stories that the corporate was weighing a sale earlier this 12 months. “If everybody desires to return in and purchase it . . . I feel that claims one thing about its potential,” Chapek mentioned.

He added: “When the remainder of the world is aware of what our plans are, they are going to be as assured about that proposition as we’re.”

Loeb seems happy to attend for Chapek’s plan — a minimum of for now.

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