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Disney Wants More Control Over Hulu

By Adam Levy – Updated Apr 10, 2019 at 7:56AM

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The media company is in talks to buy AT&T's 10% stake in the streaming service.

Disney (DIS 0.98%) is set to own a 60% share of Hulu once it closes its acquisition of 21st Century Fox (FOX) (FOXA), but Disney will still have to deal with Hulu's co-owners, AT&T (T 0.38%) and Comcast (CMCSA -0.64%).

Well, maybe just Comcast.

Disney is in talks with AT&T to acquire its 10% stake in the subscription video-on-demand service, according to a report from Variety. Gaining further control of Hulu could accelerate Disney's plans to increase its investments in content and geographic expansion. AT&T, meanwhile, could accelerate its debt repayment.

Hulu's logo built out of succulent plants

Image source: Hulu.

A key part of Disney's streaming portfolio

Disney's streaming strategy includes offering three separate services tailored to distinct audiences. ESPN+ is for sports fans, Disney+ is for family-friendly films and series, and Hulu carries more adult-oriented entertainment. That stands in contrast to AT&T's plan to offer a single three-tiered service featuring WarnerMedia content later this year.

Disney is already investing a lot of money in acquiring content for ESPN+ and creating originals for Disney+, but Disney plans to expand investment in Hulu, too. Hulu has started developing its own original content, some to much critical acclaim. Still, during Disney's fourth-quarter earnings call in November, CEO Bob Iger said, "... [W]e think there's an opportunity to increase investment in Hulu, notably on the programming side."

Disney also wants to expand both Hulu and Disney+ to Europe. Initially, it hoped to leverage Sky TV as a means of introducing its direct-to-consumer services to Europeans. Unfortunately for Disney, Comcast outbid Fox for the European pay-TV operator. It's not clear if Comcast shares the same ambition as Disney with regard to expanding Hulu into a territory where it's just invested in a competing video platform.

As a result, Disney may have to invest more cash in a European expansion for Hulu. An extra 10% stake in the company may give Disney the incentive needed to make the investment.  

Check out the latest earnings call transcript for Disney.

AT&T needs the cash

It's no secret that AT&T has a lot of debt. The company ended 2018 with $176.5 billion in debt. Its net debt to adjusted EBITDA ratio remains above 2.8. By the end of 2019, AT&T's management expects to pay down enough debt to reduce that ratio to 2.5.

Last summer, Disney pegged Hulu's value at $9.3 billion. That makes AT&T's 10% stake worth around $930 million, and maybe more based on Hulu's reported growth. AT&T could put that money straight toward debt repayment.

Importantly, AT&T doesn't have a lot to gain from its small stake in Hulu. It's going to move more of its WarnerMedia assets to its own streaming service as soon as it can, and it has already established itself in the direct-to-consumer and streaming video markets with DirecTV Now and HBO Now. The 10% stake in Hulu is likely more valuable in Disney's hands than in AT&T's.

What about Comcast?

Comcast is also planning to launch its own streaming service early next year, but it doesn't appear interested in relinquishing its 30% share of Hulu. "Disney would like to buy us out. I don't think anything's going to happen in the near term," NBCUniversal CEO Steve Burke told Variety in January.

Still, the company's efforts in building out its own streaming service will impact Hulu. Burke plans to reclaim shows like "Saturday Night Live" and "The Tonight Show" for Comcast's streaming service. NBCUniversal shows account for 17% of viewership on Hulu, according to Burke.

That said, Comcast's management remains open to licensing content to other streaming platforms where it makes sense. But if Comcast can grow its own streaming platform in popularity, it would become increasingly attractive for it to retain its best content for itself. If and when that happens, Comcast may be more interested in selling its stake in Hulu to Disney.

In the meantime, an extra 10% stake for Disney won't change much for Comcast. But it will give Disney a greater incentive to grow Hulu as part of its overall streaming strategy. 

Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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