Wednesday, April 6, 2016

Staggs Departure Suggests Internal Strategic Turmoil But Ultimately Will Lead To the Sale of Disney

Tom Staggs represented Disney exceptionally well to many constituencies but mostly to the investment community.  However, his departure suggests a internal strategic conflict that will roil the company for sometime. 

Years ago,  we recommended an out-of-favor Disney because Tom inspired confidence as CFO. Now as a shareholder, we see his leaving as a real loss at a time when the legacy networks, especially ESPN, are facing tremendous structural challenges. Some reporting (WSJ) has focused on the Board's desire to expand the succession search beyond Staggs, which explains his departure. Staggs experience wasn't creative enough (supposedly) but financial and strategic. Sheryl Sandberg, COO of Facebook (and a Disney Board member)  and other unnamed outside executives are mentioned as successors.  We doubt whether there is an outsider--presumably, from the social media world who would give up the bright prospects of a Facebook, Google, Amazon, or even WhatsApp, to take on the challenges of Disney's legacy business. Certainly, there isn't anyone from the cable or entertainment business either as qualified as Tom. So, what is the expanded search all about? 

The move to expand the search suggests that the board has conflicting ideas of Disney's direction. 
  • Some reporting has Perlmutter (Disney's largest shareholder and formerly of Marvel) promoting more creative projects to buttress the studio and consumer products. 
  • We also believe that Media Networks, and particularly, ESPN management is arguing for more resources to defend that business in a period of turmoil. 
  • The parks also require massive amounts of capital to continuously refresh the offering. 
  • We don't think that Iger was able to persuade the Board that the company is an integrated creative/financial construct.  
We think Disney will continue to be a mid-single digit top line grower as it has been recently. It will also continue to be a reliable dividend payer with an excellent balance sheet and good interest and dividend coverage. But, the enterprise value of Disney is likely not to grow as fast as earnings or EBITDA. It seems to us that, strategic buyers will likely continue to mark down the multiple of the media networks segment particularly the multiple for ESPN.

In our view, the ultimate way for Disney forward is to continue down the path of consolidation in the media business and then to sell itself to one of the social media companies--whose market caps are by the way are several times larger than Disney's. We believe that the purchase of Netflix, in particular, would add strategic strength to Disney's media and content businesses. Some of Viacom's troubled networks, or the other smaller cable networks (all of which are in play) could also fit, but are not going to move the investment needle dramatically. 

A built up Disney which was then sold to a strategic buyer would ensure Iger's legacy and reward long term investors handsomely.  Ultimately that's the end game. 

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