In February, Disney CEO Bob Iger surprised employees and investors by saying “everything is on the table” about Hulu’s future, adding that its content is “undifferentiated.”
Many believe Iger is ready to ditch the streaming service. But just three months later, Iger said his remarks were “a little harsh,” insisting he planned to keep Hulu and integrate it with the Disney+ app.
By early next year, Iger will find out how big the decision is to keep Hulu, one of the Only murders in the building and Bear, It will cost him. On September 30, Iger’s team will begin a months-long process with Comcast to determine the value of the cable giant’s minority stake in Hulu, laying the groundwork for Disney to acquire the company and take full ownership.
Disney and Comcast have had a rocky relationship over Hulu since 2019, when Iger’s company acquired a 66% stake in the streaming service through its acquisition of 21st Century Fox. Comcast holds a 33% stake, and the two companies agreed at the time that they could sell or buy all of Hulu at a valuation of at least $27.5 billion.
The process of determining the value of Comcast’s shares was expected to begin sometime next year, but the companies recently agreed to start earlier. Wall Street analysts admit they don’t know what the outcome will be, but the consensus is that Disney will eventually have to pay at least $9 billion, if not more, for a 33% stake.
Comcast CEO Brian Roberts called Hulu a “kingmaker asset” at a Goldman Sachs conference this month. He believes Hulu’s value has grown significantly since 2019 and said that if bundled with flagship streaming service Disney+, a reasonable price would be $60 billion due to potential synergies and reduced customer “churn.” about.
“Hulu is a great business,” Roberts said. “I think if we sold all of these as is, there would be a line of bidders all over the block.”
However, analysts say Disney wants Hulu to be valued as close as possible to the “floor price” of $27.5 billion. “Any payments above this level could put pressure on Disney’s equity,” Citi analyst Jason Bazinet wrote in a recent research note. “Hulu’s valuation could easily put pressure on Disney’s equity.” People are disappointed: Either Disney pays more than investors expected, or Comcast earns less than investors expected.”
After two, possibly three, reviews of Hulu’s value, it’s not expected to have an answer to this dilemma until at least the end of the year.
The companies will appoint an investment bank to serve as the valuer. If the price agreed upon is within 10% of each other, Hulu’s value will be set as the average of the two figures. Analysts believe this outcome is unlikely given the expected difference between the valuations given by bankers for the two companies.
If they fail to determine a price through the first process, a third bank will be hired to price Hulu. In this case, the final value will be the average of the closest two of the three estimates.
“Given the unique nature of Hulu as a business and the role that the three arbitrator valuations played in providing the ultimate value,” Morgan Stanley analyst Benjamin Swinburne wrote in a research note. effect, the valuation results vary significantly.”
“Both sides have an incentive to provide reasonable valuations (because) the outliers among the three valuations will be eliminated,” New Street Research analyst Jonathan Chaplin said in a note. throw away”.
“We don’t know where that’s going to happen,” Chaplin said, but added that he expected the figure to be higher than the $27.5 billion floor price because that would “assume no change in Disney’s value and no synergies.” .
According to Citigroup estimates, Disney faces high risks. If the valuation exceeds $29.5 billion, Disney will need to raise funds through debt issuance to acquire Comcast’s shares. With Disney’s stock price near five-year lows, it is unlikely that it will issue stock to pay for the expenses. Disney had $11.5 billion in cash on its balance sheet at the end of its most recent quarter.
Analysts say investors have expressed some concerns about Disney’s cash flow. Last week, Disney said it would double its theme park spending to $60 billion over the next 10 years. Shares fell after the news as investors worried about potential pressure on Disney’s free cash flow before those investments start paying off. Iger also pledged to start paying a small dividend by the end of the year.
Comcast said it would use the proceeds to buy back its stock.
Iger and Roberts are both long-serving media CEOs who have competed against each other for decades.
Iger served as president and chief operating officer in 2004 when Roberts launched a failed hostile bid for Disney. In 2018, Roberts offered Rupert Murdoch a higher price for 21st Century Fox than Iger had already offered, forcing the Disney CEO to significantly raise his bid. The bidding war pushed the final price Disney paid to $71 billion, a figure some shareholders criticized as too high.
The talks with Hulu come as Iger seeks to cut costs and exit a declining business. Disney’s streaming business is expected to lose money through 2024, and Iger has floated the idea of selling Disney’s traditional TV assets such as the ABC network. He also acknowledged that some of Disney’s film studios need a creative spark again.
Disney and Comcast declined to comment.
Disney doesn’t break out Hulu’s profitability, but in the latest quarter, the streaming service’s operating income and revenue increased due to higher prices and an increase in subscribers.
Hulu had 48.3 million subscribers in the third quarter, up from about 30 million in 2019, and average monthly revenue per subscriber increased to $12.39 from $11.73 due to price increases. Hulu is second only to Netflix in average daily engagements, according to data from Morgan Stanley and Nielsen.
Roberts believes Hulu’s value has been appreciating since 2019 despite a shift in investor sentiment toward streaming.
“The company is worth a lot more today than it was then,” Roberts said at the Goldman Sachs conference. “We’re pleased to have this resolved.”
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