As his investment firm, Third Point, builds its stake in Disney, activist investor Dan Loeb sent a letter to Disney CEO Bob Chapek outlining his call for how the company can unlock value in the near-term — and at the top of his list is cost-cutting.
“Disney’s costs are among the highest in the industry, and we believe Disney significantly underearns relative to its potential,” Loeb wrote in a memo sent on Aug. 15. “We urge the Company to embark on a cost cutting program that addresses both margins and the disposal of excess underperforming assets.”
The activist investor did not name what he views as “underperforming” assets in the letter to Chapek and Disney’s board of directors. He wrote that the 11-person Disney board, chaired by Susan E. Arnold, needs a “refresh” and should add new members. “This is not meant to single out any current board members, but we believe there are gaps in talent and experience as a group that must be addressed,” Loeb wrote.
The New York-based hedge fund manager also is calling for Disney to evaluate whether to spin off its ESPN business and integrate Hulu directly into Disney+ platform. While noting several “advantages” that Disney has in keeping its sports powerhouse brand in its bundle of direct to consumer content — ESPN+ currently has 22.8 million subscribers — Loeb wrote that “we believe that a strong case can be made that the ESPN business should be spun off to shareholders with an appropriate debt load that will alleviate leverage at the parent Company.”
The investor also said that, if spun off, ESPN would “have greater flexibility to pursue business initiatives that may be more difficult as part of Disney, such as sports betting.” The sports betting market is growing as more states legalize online betting, but Disney’s family-friendly brand image may be at odds with a full embrace of that revenue stream.
As for Hulu, which sits at 46.2 million subscribers compared to Disney+’s 152.1 million, Loeb believes that the general entertainment streamer should be folded into Disney+ in order to “provide significant cost and revenue synergies, ultimately reigniting growth in the domestic market.” The investor also wrote that Disney should acquire Comcast’s share of Hulu before a 2024 contractual deadline to do so.
Loeb’s suggestion to add Hulu directly to Disney+ reiterates a call he made when he sent an earlier letter, in Oct. 2020, to Disney leadership. At the time, the investor said Disney should increase its content spending for its direct-to-consumer services in order to “further broaden the divide between Disney and its traditional media peers.” Loeb added in the 2020 letter: “Given that Disney+’s subscriber base is already meaningfully larger than any of your other DTC services, we believe Disney would benefit from a single customer acquisition vehicle led by Disney+.”
Loeb has taken activist positions on multiple media conglomerates, including calling for Sony to be broken up to spin off its semiconductor business into a separate firm (Sony leadership rejected that plan). In his latest letter, Loeb noted that Third Point took an initial investment in Disney in 2020.
On Aug. 10, Disney disclosed in its latest earnings report that its direct-to-consumer streaming division saw a quarterly loss of $1.06 billion. The company is planning on spending $32 billion on entertainment content this year — trimmed from $33 billion — with about a third of that spend on sports content. Additionally, Disney revised down its combined subscriber target for its streaming services Disney+, Hulu, ESPN+ and Disney+ Hotstar from 230 million to 260 million by 2024 to 215 million to 245 million by the end of the same fiscal year.
In reply to Loeb’s letter, Disney did not respond to Third Point’s suggestions specifically, but touted the strength of its existing business and structure. Disney also touted the “significant expertise” of the current board that Loeb is looking to “refresh.”
“We welcome the views of all our investors. As our third quarter results demonstrate, The Walt Disney Company continues to deliver strong financial results powered by world-class storytelling and our unique and highly valuable content creation and distribution ecosystem,” Disney wrote in reply to Loeb. “Under the leadership of Bob Chapek, the company has delivered this strong performance while navigating the COVID-19 pandemic and its aftermath, including record streaming subscriptions and the reopening of our parks, where we have seen strong revenue and profit growth in our domestic parks business.”
Disney added, “Our independent and experienced Board has significant expertise in branded, consumer-facing and technology businesses as well as talent-driven enterprises. The Board has also benefited from continuous refreshment with an average tenure of four years.”
Since Jan. 3, the first day of trading in 2022, Disney stock has fallen about 20 percent, although the company’s stock rose slightly on Monday after Loeb’s letter was made public.