Activist Investor Dan Loeb Urges Disney to Spin Off ESPN

Activist investor Dan Loeb sent a letter to Disney CEO Bob Chapek urging him to refresh Disney's assets and spin off ESPN into a new company.Loeb's letter comes as his investment firm, Third Point, builds its stake in the Walt Disney Company."ESPN would have greater flexibility to pursue business initiatives that may be more difficult as part of Disney, such as sports betting," Loeb said. "We believe that most arrangements between the two companies can be replicated contractually, in the way eBay spun PayPal while continuing to utilize the product to process payments."ESPN generates around $7 billion to $8 billion in annual profit, but Wall Street experts consider the brand a negative weight for Disney's value compared to streaming services like Netflix.The ESPN cable network keeping Disney tethered to a linear television business in structural decline explains the disparity in perception between Disney and Netflix.Puck News reported on this topic using the market numbers from last October (numbers have changed), explaining:"Disney's stock is sitting at about $174 per share while Netflix's trades in another altitude, at $633 per share. One potential reason? Despite its streaming success, Disney is still valued by Wall Street as a behemoth with legacy assets rather than as a pure play streamer. And this, in large part, is thanks to ESPN, which fuels a "media networks" segment."

PHOENIX, AZ - DECEMBER 27: The ESPN logo on a camera before the Cheez-It Bowl college football game between the Air Force Falcons and the Washington State Cougars on December 27, 2019 at Chase Field in Phoenix, Arizona. (Photo by Kevin Abele/Icon Sportswire via Getty Images)

Disney's stock price does not fully capture its extensive library because it's connected to a linear ESPN network hemorrhaging television subscribers.ESPN and ESPN2, like most cable networks, are declining businesses. In 2021, ESPN lost eight million cable and satellite subscribers. That's 10% of ESPN's overall subscriber base. ESPN has 75 million subscribers, down from over 100 million subscribers just over a decade ago.Loeb envisions Disney pivoting its business to one all-in streaming service, combining Hulu and Disney+. Note: Disney cannot aptly make this move until 2024 when it purchases Comcast's 33% stake in Hulu."We believe that integrating Hulu directly into the Disney+ DTC platform will provide significant cost and revenue synergies, ultimately reigniting growth in the domestic market."Warner Bros. Discovery took a similar approach by merging Discovery+ into HBO Max to create one comprehensive streaming platform.That's Loeb's vision for Disney: spin-off ESPN, mostly cut ties with linear cable, and merge Hulu and Disney+. CEO Bob Chapek appears only interested in the latter.Disney released a statement pushing back at Loeb's letter on Monday:"We welcome the views of all our investors," Disney said in a statement. "As our third quarter results demonstrate, The Walt Disney Company continues to deliver strong financial results powered by world-class storytelling and our unique and highly valuable content creation and distribution ecosystem. Under the leadership of Bob Chapek, the company has delivered this strong performance while navigating the Covid-19 pandemic and its aftermath, including record streaming subscriptions and the reopening of our parks, where we have seen strong revenue and profit growth in our domestic parks business."