Inside info?–Is DIS selling ABC?

Offer one:  earnings data

Last week, authorities arrested the assistant to a high-ranking DIS communications official and her boyfriend.  The boyfriend allegedly sent a cold-call form letter to a large number of hedge funds earlier this year, offering to sell them advance copies of  DIS March quarter earnings information, which the girlfriend has presumably agreed to provide.

To even a criminally minded recipients of such an offer, several allied threads of reasoning must have gone through their minds:

–the writer wasn’t particularly bright to put the offer in writing and send it to a complete stranger,

–could this possibly be a pathetic attempt at a sting operation by the SEC?

–in the case of a mature, large-cap company like DIS, would any earnings surprise be large enough to move the stock a significant amount?

–who else got the letter?

–was this a colleague’s idea of a joke?

Having a strong sense of ethics, or maybe seeing nothing but downside from the offer, the recipients turned the boyfriend in to the SEC.

Offer two:  asset sales

The boyfriend also allegedly said he could provide details of advanced negotiations between DIS and private equity firms to sell them ABC television.  As the story came out, DIS denied it (which means nothing.  It could be there are “discussions” under way but no “negotiations,” in DIS’s mind, or that there are discussions, but they’re not “advanced,” or some other such equivocation).

The possible sale of ABC is much more interesting information than whether DIS will report eps of $.60 a share or $.61 in any given quarter.  And the fact that something is brewing, which was being offered for free (DIS stock temporarily rose by 5% on the announcement of the arrests and the reasons for them), is probably more significant than the names of the private equity firms.

Why would selling ABC be good news?

Traditional network broadcast TV is moving down the internet-created road to oblivion already trod by music sales, newspapers, books and magazines.  Content creation for viewing on home screens will doubtless survive, but it’s likely that over-the-air delivery won’t.  ABC has both.  It’s not clear what parts of ABC are supposed to be being sold; although my guess would be gaining the content creation business would be the inducement for someone to take the network.

DIS seems to me to be running ABC in a reasonable way, trying to maximize the cash flow it generates for investment elsewhere in DIS, while retaining some degree of profitability.  ABC is small in the scope of overall DIS, both in terms of contribution to operating income and in potential value as a sale at maybe $1 billion.

If ABC is so tiny a part of DIS, why should investors be interested one way or the other about what happens with ABC?  The answer is the real, and—I think—non-obvious, concern of investors about ABC.

The real investment issue is, to coin a phrase, the profit asymmetry of the ABC business.  Wall Street firmly believes that there’s a ceiling, and a gradually downward-sloping one at that, for the earning potential of ABC.  It’s not plausible that anything surprisingly good, and enough to move the DIS stock price up, is likely to emerge from normal ABC operations.  So there’s only downside.

One possibility is that profits continue a gentle decline to the point that one day ABC simply isn’t there anymore.  That’s the good case.  On the other hand, it’s possible that we wake up one day to find that ABC is spouting red ink like the BP well in the Gulf of Mexico is spouting oil, and that it will cost, say, $3 billion to shut it down.  Think: music, or newspapers.

I’m not saying that the second case is likely.  I have no opinion.  But it’s a common pattern with companies that an apparently insignificant business an investor decides to give little research effort to suddenly turns into a black hole of losses that begins devouring the profits of the rest of the company.

The good news for an analyst, then, would be the removal of uncertainty surrounding a complex business that adds little to DIS but could lose it a lot.

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