- Investors may welcome Disney’s decision to consider selling some legacy media companies, even if the deal price doesn’t break the bank.
- Divesting legacy businesses that have a lower growth profile is symbolically more important to Disney and its shareholders than the purchase price of the assets.
- Disney has held initial discussions with Nexstar about selling ABC and its own local affiliates, although no deal has been secured.
Walt Disney Company Chairman Bob Iger and Mickey Mouse look on before ringing the opening bell at the New York Stock Exchange (NYSE) on November 27, 2017 in New York City.
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When a person or company sells something, the primary motivation is usually to get as much money back as possible.
Disney’s motivation to potentially sell ABC and its subsidiaries, linear cable networks and a minority stake in ESPN does not depend on what those assets would fetch if sold. It’s about signaling to investors that it’s time to stop viewing Disney as an old medium.
Disney’s market capitalization is approximately $156 billion. The company has around $45 billion in debt. Selling assets can help the entertainment giant reduce its debt ratio while mitigating ongoing losses from its streaming business.
Still, that’s not the main reason Disney CEO Bob Iger told CNBC in July he was considering selling media assets – something he has long resisted. Rather, a sale of ABC and linear cable networks would send a message to the investment community: The era of traditional television 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. Next to the parks, it is his greatest asset. The linear business is something that Disney has clearly signaled will decline. They don’t necessarily want to protect it. If they can get some of that down.” “If we take the negative growth business off the books and transfer it to a better, more logical operator, we think that’s good for the stock.”
As Bloomberg reported Thursday, Nexstar has held preliminary discussions with Disney about acquiring ABC and its owned-and-operated subsidiaries. Media mogul Byron Allen has made a preliminary offer to pay $10 billion for ABC and its subsidiaries, as well as cable networks FX and National Geographic, according to a person familiar with the matter.
Disney issued a statement Thursday saying, “While we are open to considering various strategic options for our linear businesses, The Walt Disney Company has not made a decision regarding the divestiture of ABC or others at this time.” Assets hit and no relevant reports submitted. “Effect is unfounded.”
The value of broadcast and cable networks has declined significantly since the 1990s and early 2000s as tens of millions of Americans have canceled cable subscriptions 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.
According to KeyBanc Capital Markets analyst Brandon Nispel, ESPN is valued at about $30 billion, “although we view it as a melting iceberg,” he added in a September note to clients. LightShed analyst Rich Greenfield values ESPN at about $20 billion.
Disney would like to retain a majority stake in ESPN, Iger told CNBC. It currently owns 80% of the sports media business and Hearst owns the remaining 20%.
About 10 years ago, analysts valued ESPN at around $50 billion.
SportsCenter at ESPN Headquarters.
The Washington Post | The Washington Post | Getty Images
Disney’s most interesting decision may be deciding what to do with the ABC network. The company can easily sell its eight owned-and-operated affiliate stations – in markets such as Chicago, New York and Los Angeles – without changing the trajectory of the media industry.
But divesting the ABC network would be a bold statement from Disney that it sees no future in the world of cable television content distribution.
Selling ABC would be particularly troubling given that Iger told both CNBC and on Disney’s recent earnings call that he wants the company to stay in the sports business.
“The sports business remains highly valued and remains a good value,” Iger said during Disney’s third-quarter earnings call last month. “We believe in the power of sport and its unique ability to bring together and engage audiences.”
At least for the next few years, it clearly makes sense to maintain a large broadcast network for the major sports leagues. NBCUniversal executives hope that owning the NBC network will convince the NBA that it should be included in a new rights agreement to broadcast NBA games. NBC is a free over-the-air service and can increase the league’s reach, they argue. Even as the world shifts to streaming, millions of Americans still use digital antennas to watch TV.
Currently, ESPN and ABC share sports rights. The sale of ABC could trigger certain change-of-control provisions that force a rewrite of existing contracts with pay-TV operators or the leagues, say people familiar with the typical language surrounding such deals.
An exit from the network could also impact ESPN’s ability to secure future sports rights deals. Without ownership of ABC, leagues could choose to sell rights to other companies, further weakening ESPN.
If Iger keeps his word and Disney stays in the sports broadcasting business, the company will have to weigh the negative externalities of ABC’s loss with the positive benefits of showing investors that it is serious about shedding declining assets.
“Of course, decoupling the linear networks from ESPN is complex, but there is nothing we believe we cannot handle if we were to ultimately achieve a strategic realignment,” Iger said last month.
If Disney does indeed strike a deal to sell ABC and investors cheer the move, it could also serve as a catalyst for other big legacy media companies to sell their declining assets. NBCUniversal, Paramount Global and Warner Bros. Discovery all have legacy broadcast and cable networks in addition to their flagship streaming services.
Disney could become a pioneer when it comes to driving the industry forward.
“We see this as a real bullish sign for Disney,” Cahall said. “There’s a lot going on at Disney right now, between ESPN and partnerships and divesting some of those things. Disney suddenly feels a little more catalytic than it did recently.”
—CNBC’s Lillian Rizzo contributed to this article.
Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.
WATCH: Nexstar could “without a doubt” take ABC and monetize it really well, says Wells Fargo analyst