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July 6, 1999

A Closer Look at Disney
by Rick Aristotle Munarriz
(TMF Edible)

Once proud Walt Disney Co. (NYSE: DIS) shareholders smell a rat. They survived through the 1980s as the company thwarted a hostile takeover and bounced back stronger than ever with Michael Eisner at the helm. They were thrilled in the 1990s as the animation studio regained the celluloid pixie dust that most figured would be gone forever like Walt Disney himself. Yet now, as the company faces its next decade under Eisner's leadership, there is mutiny brewing aboard the Steamboat Willy.

"I am looking out the window and can see the seasons change," Eisner begins in the latest Disney annual report, and one has to wonder if those are autumn leaves, bailing executives, or the ailing share price he sees falling. Over the past year Disney's stock price has fallen from $42 3/8 to under $30. That's a pretty mousy retreat for a Dow component in this bull market.

When Eisner first came aboard, opportunity was an E-Ticket commodity. He took the company's solid gold brand in family fun and entertainment and parlayed it into retail stores and cable programming. It worked. It became a well-oiled merchandising machine. Characters from the newest animated release would show up as plush animals at Disney Stores, parade about in the theme parks, and eventually lend substance to The Disney Channel.

Today it's hard to imagine what entertainment-related segments the company has yet to enter. With cruise ships, athletic teams, network broadcasting (the ABC TV network), and even a 43% stake in Infoseek (Nasdaq: SEEK), the Internet's fourth largest portal, Disney has become the country's second largest entertainment conglomerate.

In the process, synergy took a left turn at Tomorrowland and wound up in Fantasyland. Earnings fell last year and have continued to dip this fiscal year. Jeffrey Katzenberg, who helped breathe new life into the animation division with new classics like Beauty & the Beast and The Lion King, left to help found Dreamworks SKG and is now suing the company for close to $600 million he alleges is owed to him in residuals. [Editor's Note: Disney and Katzenberg settled the suit on July 7th. Terms were not disclosed.] Capital Cities/ABC has yet to bear the fruit of Disney's $19 billion purchase price. And last year, Disney opened a fourth Florida theme park while attendance at the first three fell.

Just a few years ago Eisner could do no wrong. Now, with the share price trading for less than it was more than a year and a half ago, the critics and cynics are looking for answers. Earnings are expected to fall yet again this fiscal year -- to just $0.71 a share. At a time when an economic boom should be hurling folks towards Disney's leisure and entertainment offerings, the company is scampering backwards.

Can Eisner put the Zip back in the Zip-a-dee-do-da? Last month the company made its first strong move towards swinging things around when Tarzan hit the theaters with the strongest box office showing ($34.2 million) since The Lion King's debut. Up next is the holiday release of Toy Story 2, with Disney splitting the profits evenly with Pixar (Nasdaq: PIXR). The live action segment has scored well recently with last summer's smash Armageddon followed by the surprise comedy hit The Waterboy. The Disney Channel now has a sibling in Toon Disney. The theme parks are faring well and we are now just months away from the grand opening of Disneyland's second theme park, California Adventure. In October the Disney Millennium Celebration will span fifteen months in the Florida parks.

While rumors abound of new theme parks popping up as close as Texas and as far away as China, Disney is actively rolling out its newest breed of virtual theme parks, DisneyQuest. Last year its first unit, a multilevel enclosed entertainment center featuring arcade games, food, and high-tech attractions, opened in Walt Disney World. Last month Chicago got one, and a third is going up in Philadelphia. If they fare well, the rollout will continue.

That's the good news. The bad news is that ABC continues to trail the pack and losing Home Improvement won't help matters much next season. Like The Golden Girls and Empty Nest, the high-rated family sitcom was produced in-house by Disney. The company was able to parlay the show's success by casting some of the series stars like Tim Allen and Jonathan Taylor Thomas into hit flicks. But, again, the wrecking ball has now struck Home Improvement.

Entering the realm of professional sports ownership was supposed to be a programming bonanza. However, the California Angels and Anaheim Mighty Ducks lack any marquee value despite recent celluloid tributes in Angels in the Outfield and The Mighty Ducks trilogy and cartoon series. ABC paid dearly for NFL football rights, yet ratings for Monday Night Football fell last year.

Even the buoyant theme park business is not without its imperfections. As the labor market dries up, the company is now looking to import new help. Walt Disney World is offering a $1500 relocation bonus to residents of Puerto Rico for entry level positions.

So where will Disney find a better mousetrap? The company is looking to spin off its online ventures, but investors shouldn't wait for a big payday on that front. If you allocate Sportsline USA (Nasdaq: SPLN) and Marketwatch.com (Nasdaq: MKTW) valuations to Disney's ESPN.com and ABCNEWS.com respectively, and tack on its 43% stake in Infoseek, you get an entity that is currently worth around $2.5 billion. That breaks down to just $1.25 a Disney share because of the big cheese's two billion shares outstanding.

Even if you were to get ambitious and tack juicy premiums to the Disney Blast online service and the namesake Disney.com offerings, it would still be a bit of a reach to expect the online spinoff to be worth much more than $2 for each Disney share.

As for next year, the analysts are Pollyannas. They expect the company to bounce back and earn $0.87 a share. Unfortunately, they thought that last year, too. With costly executive defections like Dick Nanula, Michael Ovitz, and Katzenberg since the 1994 death of President Frank Wells, the pressure is squarely on Eisner's shoulders to rekindle the magic. Can he teach himself new tricks? Meanwhile, shareholders are watching a bull market roll by with their stock stuck in neutral.

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