The Walt Disney Company (NYSE:DIS) was persuaded to lower its dividend and increase its spending on streaming about two years ago thanks to an activist campaign led by Daniel Loeb’s Third Point. Undoubtedly, this approach has been highly effective. Disney has over 14.4 million more customers than Netflix (NASDAQ:NFLX), making it the latter’s main streaming rival as of the just-announced June 2022 quarter. And maybe most significantly, Disney Plus, Hulu, and ESPN collectively now have more members than Netflix. According to reports, Third Point sold its equity holding in Disney early this year. But the activist investor is back now with additional demands that, in my opinion, are very reasonable for shareholders.
The entertainment conglomerate has underperformed the market thus far and is still down more than 30% from its all-time high.
Letter from Daniel Loeb on Disney
Daniel Loeb sent the following letter to Disney CEO Bob Chapek on August 15th:
“…This quarter’s results are an important proof point that Disney’s complex transformation is succeeding and our confidence in Disney’s current trajectory is such that we have, in recent weeks, repurchased a significant stake in the Company.”
He added: “… the Company will likely require additional strategic, capital allocation, and governance changes to ensure its success.”
Daniel Loeb outlined four essential strategy requirements to enable value creation for shareholders:
4 Important Strategy Demands
- Buy 100% of Hulu
Mr. Loeb stated that the direct integration of Hulu into the Disney+ DTC platform would, in his opinion, result in sizable cost and revenue benefits. He urges the company to exhaust all reasonable efforts to buy the remaining minority interest held by Comcast before the contractual deadline in early 2024.
I concur that Hulu should be fully purchased. Comcast (NASDAQ:CMCSA) has maintained a 33% equity share in Hulu even after Disney purchased operational management of the streaming service in 2019. This may have affected the streaming service’s foreign expansion and helped to inform the decision to operate Hulu separately from Disney Plus.
Policy on Dividends
Mr. Loeb implores the company to uphold this practice and utilize free cash flow for debt reduction, share repurchases, or organic business growth.
Since I don’t invest much in dividends, I agree with Daniel Loeb. I favour a terrific company that invests its cash flows back into the company. Furthermore, dividends have nothing to do with wealth creation; they are only the “distribution” of assets.
- ESPN spinoff
Mr. Loeb also believes 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.
To be honest, I’m not sure how I feel about this one. Investors lack sufficient knowledge to evaluate this proposition (e.g., what are the economics of this service, including debt allocation). In addition, the loss of ESPN would negatively affect Disney’s ability to package various services, a benefit that Netflix cannot match. As a result, I don’t have a position on Daniel Loeb’s request.
- Costs Reduction
Mr. Loeb said that cost-cutting Disney has some of the highest costs in the business, and he thinks that the multinational mass media company makes far less than it should.
Obviously, this is very logical. I enjoy cost-cutting activities as an investor because they encourage larger levels of free cash flow, which may then be paid out to investors or reinvested for strategic company decisions.
Daniel Loeb’s requests have not received a favorable response from the company, but it reiterated its “trust” in its “autonomous” management team.
Bottom Line
I am bullish on Disney shares. I believe that Daniel Loeb’s requests are reasonable for investors. First and foremost, despite being quite popular in Covid-19, streaming has lost much of its “growing” lustre. Therefore, a profitability-focused approach should be looked at favorably. In conclusion, even though I don’t question that the entertainment conglomerate will set new records, I believe the process will likely move more quickly now that Loeb is engaged.
Featured Image: Megapixl © Sergiolima9
