Disney asset sales will move media industry forward

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Chief executive officer of The Walt Disney Company Bob Iger and Mickey Mouse look on before ringing the opening bell at the New York Stock Exchange (NYSE), November 27, 2017 in New York City.

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Usually when a person or company sells something, the primary motivation is getting back as much money as possible.

Disney‘s motivation to potentially sell ABC and its owned affiliates, linear cable networks and a minority stake in ESPN isn’t predicated on what these assets will fetch in a sale. It’s about signaling to investors the time has come to stop thinking about Disney as old media.

Disney’s market capitalization is about $156 billion. The company has about $45 billion in debt. Selling assets can help the entertainment giant lower its leverage ratio while buffering the continued losses from its streaming businesses. Disney also could use the cash to help fund its likely acquisition of Comcast’s minority stake in Hulu.

Still, that’s not the prime rationale for why Disney Chief Executive Bob Iger told CNBC in July he’s contemplating selling off media assets — something he’s long resisted. Rather, a sale of ABC and linear cable networks would be a message to the investment community: The era of traditional TV is over. Disney is ready for its next chapter.

“Disney almost has a good bank and a bad bank at this point,” Wells Fargo analyst Steven Cahall said in a CNBC interview. “Streaming is its future. It’s its strongest asset, next to the parks. The linear business is something Disney has clearly signaled is going to be in decline. They’re not looking to necessarily protect it. If they can move some of that lower, negative-growth business off of the books and to a better, more logical operator, we think that’s good for the stock.”

Nexstar has held preliminary conversations with Disney to acquire ABC and its owned and operated affiliates, Bloomberg reported Thursday. Media mogul Byron Allen has made a preliminary offer to pay $10 billion for ABC and its affiliates along with cable networks FX and National Geographic, according to a person familiar with the matter.

Disney released a statement Thursday saying “while we are open to considering a variety of strategic options for our linear businesses, at this time The Walt Disney Company has made no decision with respect to the divestiture of ABC or any other property and any report to that effect is unfounded.”

Declining values

The value of broadcast and cable networks has significantly declined from the 1990s and early 2000s as tens of millions of Americans have canceled cable in recent years.

Cahall values ABC and Disney’s eight owned affiliate networks at about $4.5 billion. That’s a far cry from the $19 billion Disney paid for Capital Cities/ABC in 1995 — the deal that brought Iger to the company.

ESPN has a valuation of about $30 billion, according KeyBanc Capital Markets analyst Brandon Nispel, “though we view it as a melting iceberg,” he added in a September note to clients. LightShed analyst Rich Greenfield values ESPN at closer to $20 billion.

Disney would like to keep a majority stake in ESPN, Iger told CNBC. It currently owns 80% of the sports media business, and Hearst owns the other 20%.

About 10 years ago, analysts valued ESPN at around $50 billion.

SportsCenter at ESPN Headquarters.

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Selling ABC

Disney’s most interesting decision may be deciding what to do with the ABC network. The company can easily sell off its eight owned and operated affiliate stations — located in markets including Chicago, New York and Los Angeles — without changing the trajectory of the media industry.

But divesting the ABC network would be a bold statement by Disney that it sees no future in the broadcast cable world of content distribution.

Selling ABC would be particularly jarring given Iger’s comments both to CNBC and in Disney’s last earnings conference call that he wants the company to stay in the sports business.

“The sports business stands tall and remains a good value proposition,” Iger said last month during Disney’s third-quarter earnings conference call. “We believe in the power of sports and the unique ability to convene and engage audiences.”

There’s clear value, at least for the next few years, in keeping a large broadcast network for major sports leagues. NBCUniversal executives hope ownership of the NBC network will convince the NBA that it should be cut into a new rights agreement to carry NBA games. NBC is a free over-the-air service and can increase the league’s reach, they plan to argue. Even if the world is transitioning to streaming, millions of Americans still use digital antennas to watch TV.

Currently, ESPN and ABC split sports rights. Selling ABC may trigger certain change-of-control provisions that force existing deals with pay TV operators or the leagues to be rewritten, according to people familiar with typical language around such deals.

Moving on from the network also may obstruct ESPN’s ability to land future sports rights deals. Without ownership of ABC, leagues may choose to sell rights to other companies, thus further weakening ESPN.

If Iger is true to his word and Disney stays in the sports broadcasting business, the company will have to weigh the negative externalities of losing ABC with the positive gains of showing investors it’s serious about shedding declining assets.

“Obviously, there’s complexity as it relates to decoupling the linear nets from ESPN, but nothing that we feel we can’t contend with if we were to ultimately create strategic realignment,” Iger said last month.

The way forward

Nexstar could 'no doubt' take ABC and monetize it really well, says Wells Fargo's Steven Cahall

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