Disney (DIS) selling ESPN to Comcast (CMCSA)?…to Apple (AAPL?)

Stock performance over the past five years looks like this:

AAPL +301%


S&P +62%

CMCSA +25%

ARKK +1.4%

DIS -21.8%.

First, I haven’t owned DIS for years. I’ve been annoyed that I missed the streaming spike in the stock. But because I hadn’t been paying attention, I hadn’t realized how bad a stock it’s been.

The AAPL rumors seem to be that it’s more interested in most/all of DIS than just ESPN. That makes sense to me. The rationale would be:

–primarily that AAPL would acquire a wide array of content creation capacity to support the AAPL ecosystem much faster than it could build an equivalent

–AAPL is a cash-generating juggernaut. DIS has a market cap of around $160 billion, which is a bit less than AAPL has spent on stock buybacks over the past two years. So the company wouldn’t need much/any external financing. And Wall Street would doubtless be ecstatic about the possibility of issuing Disney-backed–or AAPL-backed junk bonds. Presumably AAPL would sooner or later spin off the theme parks as a separate entity, either as a stock dividend, a public listing of some sort or a combination of the two.

The DIS/CMCSA story may well have been spawned by the fact that DIS will likely have the rest of Hulu put to it by CMCSA on 1/1/24. That bill will be $9 billion or so. Why not do a bigger deal and trade away ESPN to CMCSA at the same time?

There’s more to it than that, though.

As a publicly-traded company owned basically by third parties, DIS executives are, in theory anyway, interested mostly in stock price appreciation. The means to achieve this is, by and large, owning businesses that are expanding, running them well and growing earnings rapidly by doing so.

CMCSA is in a different situation. The Roberts family controls it through its ownership of a special, extra votes-bearing, class of shares. With the exception of figures like Elon Musk, who seems to me to be a risk seeker, theory says as people become more wealthy, they become increasingly risk-averse (this has certainly been evident in every private company I’ve worked for).

Today’s ESPN is a cash cow, not a rising star. To pluck a number out of the air–another way of saying “my best guess,” ESPN will generate $3-$4 billion in operating income after capex for years to come. Let’s say that income stream has a present value of $30 billion. Arguably, this number is entirely factored into the DIS stock price already. So unless ESPN springs back to youthful growth (not something I’d bet the farm on), nothing it does will make the DIS stock price go up. So ESPN is sort of like a bond, a source of steady income and nothing more.

For the Roberts, on the other hand, the biggest issue is, in my view, to maintain the current income stream from CMCSA which they control through their high ownership interest. A bond is ideal for them.

Suppose DIS sold ESPN to CMCSA for, say, $26 billion, of which $9 billion would be the Hulu purchase. So, $16 billion in cash. The Roberts would suddenly be $5 billion richer …and DIS would have $16 billion to invest in the remaining business that they would have to wait for five years otherwise to get. My figures would be way off, but I don’t think the general idea is. Shift an income business out of a presumably growth-oriented company and bring in a pile of cash that can be used to create new growth with.

By the way:

–when I looked up prices, I expected CMCSA to have underperformed the S&P. I was more than mildly surprised to see DIS at the bottom of the heap. Close to half its underperformance vs. the S&P 500 has come since the DeSantis political attack on the company. Even without that, though, CMCSA has been the better of the two stocks

–I suppose there’s no reason that DIS couldn’t spin off Disneyworld as, say, a REIT, and charge a huge management/licensing fee that would drain away most of DWs operating income–essentially letting DW gradually die. Probably bad for DIS, horrible for Orlando–and likely damaging for CMCSA, which owns a Universal theme park there, as well.

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