Disney new target of activist Dan Loeb over dividends, streaming
Loeb says his plan will allow Disney to overtake Netflix in subscribers
Activist investor Dan Loeb is urging The Walt Disney Company's CEO Bob Chapek to halt its $3 billion annual dividend payment and redirect the funds towards content production and acquisition for its streaming service, Disney+, according to a letter Wednesday obtained by FOX Business.
DAN LOEB'S LETTER TO DISNEY CEO BOB CHAPEK
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| DIS | THE WALT DISNEY CO. | 117.47 | -0.13 | -0.11% |
"By reallocating a dividend of a few dollars per share, Disney could more than double its Disney+ original content budget," Loeb wrote. "These incremental dollars would, based on our analysis, generate returns that are multiples of the stock's current dividend yield by driving high life-time-value subscribers to your [direct-to-consumer] platform."
Besides bringing in additional subscribers, Loeb said "increased velocity of dedicated content production will deliver several knock-on benefits spread across your existing base including elevated engagement, lower churn, and increased pricing power."
Loeb, who doubles as CEO and chief investment officer of hedge fund, Third Point LLC wrote that driving more subscriber growth, while reducing "churn" and increasing pricing will "present the opportunity to create tens of billions of dollars in incremental value for Disney shareholders in short order, and hundreds of billions once the platform reaches a larger scale."
Churn is the rate at which customers stop subscribing to video services.
Disney announced in its third quarter earnings report in August that the streaming service had surpassed 60 million subscribers. Meanwhile, Disney-owned Hulu has surpassed 35.5 million subscribers and ESPN+ has surpassed 8.5 million subscribers.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| AMC | AMC ENTERTAINMENT | 4.98 | +0.18 | +3.77% |
The letter comes as the coronavirus has prompted the acceleration of cord-cutting from traditional cable and has forced media companies to adapt to a new release model while the pandemic continues to prompt the closure of theaters across the globe, including Cineworld's Regal Cinemas. As for Cineworld's competitors, AMC and Cinemark, both have expressed their commitment to remain open during the pandemic.
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Loeb argued that the new focus on streaming content would allow Disney to stand out amongst its other media competitors.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| AMZN | AMAZON.COM INC. | 210.71 | +2.82 | +1.36% |
| NFLX | NETFLIX INC. | 897.74 | +10.93 | +1.23% |
"A more aggressive content roadmap will distinguish Disney as the only traditional US media company able to thrive in a world beyond the box office and the cable TV ecosystem, alongside digital-first businesses like Netflix and Amazon," Loeb said.
Loeb is also recommending that Disney condense its additional content assets, including Hulu, ESPN+, and the upcoming offering Star, under one platform with its current Disney+ content. He believes the move will allow the company to exceed the subscriber base of the industry leader, Netflix, in just a few years.
However, he warned that time is of the essence and that Disney should consider "significant additional investments in content both through production and acquisitions here and abroad."
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While Disney has been moving big-budget films such as "Mulan" to Disney+ as a matter of necessity due to theater closings during the pandemic, Loeb sees this as the future. The activist investor stressed the benefits that would come from Disney putting its blockbusters straight onto the streaming platform.
"While some pundits have described the Mulan release as a “debacle” due to the $29.99 cost for a VOD download, we see this as a valuable learning experience, expect stumbles on the way to greatness, and believe this will drive a faster decision to make all content available to subscribers for a simple subscription fee," Loeb said.
However, he noted that the media giant should try a different approach going forward than Mulan's initial pay-per-view strategy, arguing subscribers want "an easier and more affordable way to access Disney’s marquee content."
Loeb is "confident" Disney can build a direct to consumer business "that will meaningfully exceed its current cable TV and box office revenue streams, but only if the company leans into this opportunity and invests more aggressively."
By making this move, Loeb concluded, the entertainment giant would be embracing. "the future of home entertainment with the utmost urgency."
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As of June 30, Loeb's Third Point LLC owns about 5.5 million Disney shares, according to a filing with the Securities and Exchange Commission.
A spokesperson for the Walt Disney Company did not immediately return FOX Business' request for comment on the letter.