Disney's World Turns

It has the makings of a soap opera, but it's real life for Walt Disney (NYSE: DIS  ) . In the latest twist, Vice Chairman Roy E. Disney is walking and has urged CEO and Chairman Michael Eisner to follow him out the door.

Ironically, back in 1984, Mr. Disney headed the battle to land Eisner. Just last year, Mr. Disney's business associate and fellow board member Stanley Gold questioned Eisner's turnaround efforts, but according to Disney, it was way back in 1994, with the death of former president Frank Wells, that the company "lost its focus, its creative energy, and its heritage."

Specifically, Mr. Disney chides Mr. Eisner's inability to rescue ABC "from the ratings abyss it has been in for years." Believe it or not, when Disney purchased Capital Cities in 1996 for $19 billion, ABC was the number one TV network. It's been number four in recent years.

What went wrong? For one, Disney lost talented senior executives in what Mr. Disney terms a "creative brain drain." It doesn't help that a number of these executives -- Michael Ovitz and Jeffrey Katzenberg come to mind -- left the building with exorbitant severance packages.

Adding to the irony (and what's a soap opera without some), Roy Disney's comments come at a time when results appear to be improving. Double-digit jumps in operating income at all business segments except theme parks can't be bad.

Sadly, the same can't be said for $13.9 billion in debt. Nor for the fact that, to increase free cash flow, Disney announced in 2002 that it would "hold down" capital investment for the next five years. Per-share capital spending, which peaked at $1.13 in 1998, came in at $0.53 in 2002.

And capital spending is the life-blood of a business like Disney's. With theme parks representing 41% of Disney's 2002 operating income, shareholders should give a thought to Mr. Disney's claim that management is showing "timidity" in its investment in theme parks and building parks "on the cheap." Failure to invest for the future could turn today's good earnings news into yet another ugly plot twist.

At Friday's $23.09 close, Disney is within a dollar of its 2003 highs. The stock is up 42% for the year and has bounced nicely off its August 2002 low of $13.48. Still, that's little comfort to investors who got hooked on this soap back in May 2000 when the stock hit an all-time high of $43.88.

The Motley Fool's active Walt Disney discussion board has covered all of the issue Roy E. Disney is raising. Join W.D and the other board participants to discuss this news and other Disney-related topics. For a 30-day free trial to the discussion boards, click here.

W.D. Crotty is a Disney shareholder.


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