Back in 2017, when Disney (DIS -1.01%) announced its intention to buy the film and media assets of the then 21st Century Fox, the acquisition was viewed as a way for the House of Mouse to jump-start its expansion into streaming video.
One of the crown jewels of that deal was Hulu. Once the Fox deal closed, Disney owned two-thirds of the veteran streaming service, while Comcast (CMCSA -5.82%) held the remaining one-third. The working assumption has always been that the House of Mouse would buy out Comcast's stake as early as 2024, but Disney CEO Bob Iger raised eyebrows last week by casting doubt on the idea.
Image source: Getty Images.
A done deal? Not so fast ...
Back in 2019, a deal was hammered out that gave Disney operational control of Hulu. At the same time, the companies stipulated that either party could initiate a sale of Comcast's stake in the streaming platform to Disney as early as 2024. In the agreement, Disney guaranteed a minimum valuation of $27.5 billion, but it would be required to pay fair market value if the valuation was higher.
It seemed clear from the structure of the deal that Disney would indeed buy Comcast's stake, becoming the sole owner of Hulu, with the only sticking point being the price. Now, that may not be the case.
A stunning reversal
In a conversation with CNBC's David Faber on Thursday, Iger signaled the move wasn't as inevitable as once believed. When asked about the approaching 2024 deadline, Iger said he didn't yet know how things would play out:
Everything is on the table right now, so I am not going to speculate whether we are a buyer or a seller of [Hulu]. But I obviously have suggested that I'm concerned about undifferentiated general entertainment, particularly in the competitive landscape that we are operating in, and we are going to look at it very objectively and expansively.
When asked about the company's response if Comcast was interested in buying Disney's stake, Iger replied, "We will be open minded."
These comments are in stark contrast to Disney's previous, very public position on the matter. As recently as September, former CEO Bob Chapek said he'd be willing to buy Comcast's stake in Hulu "tomorrow" while admitting an early consummation of the deal was unlikely.
Why the change of heart?
The evolution of the entertainment landscape may not be the only consideration in Disney's deliberations. A recent proxy fight -- which has since been settled -- broke out between Disney and activist investor Nelson Peltz of Trian Fund Management. One of the bones of contention was Disney's massive spending on the Fox deal and its resulting heavy debt load.
Disney closed out its fiscal 2023 first quarter (which ended Dec. 31) with more than $48.4 billion in debt on its balance sheet. For context, prior to its acquisition of Fox assets, that number was less than $21 billion.
The company recently announced a restructuring that included 7,000 layoffs and cost cuts of $5.5 billion. The moves were presumably made to strengthen Disney's financial position and hasten the profitability of its streaming units -- profits that could then also be used to pay down debt.
Another factor weighing on Disney's decision could be purely logistical. When Iger announced Disney's strategic reorganization, one of the key priorities the company outlined was (emphasis mine) "primarily focusing on and significantly investing in our core brands and franchises." In a presentation outlining its plans, Disney said it would focus on a "more curated selection of general entertainment," something Iger alluded to in his comments. The company will be laser-focused on beloved (and profitable) franchises, including Pixar, Marvel, and Lucasfilm.
Investors will have to wait to see where, or if, Hulu fits into Disney's future plans.
Serious consideration or classic misdirection?
Disney has nearly $8.5 billion in cash on its balance sheet, so the media giant would have to drain its coffers and take on additional debt if it did decide to acquire the remaining stake in Hulu. With a minimum valuation for Hulu of $27.5 billion, Disney would have to cough up at least $9 billion, though the selling price could be higher. The final value will be determined by an independent team of experts, which could be a wild card in the final assessment.
The biggest consideration may be the performance of Hulu itself over the coming year. In Sept. 2019, Disney estimated Hulu's subscriber base at approximately 29 million. As of Dec. 31, 2022, that number had risen to 48 million, an increase of almost 66%. Not only that, the average revenue per user of $12.46 for Hulu dwarfs the core Disney+ rate of $5.77. Investors will want to watch for a continued strong performance from Hulu over the coming year, as it will likely factor into Disney's final decision.
There's no question that Iger is a shrewd negotiator, having wrangled multiple deals for Disney in the past. At this point, it's hard to say if Disney is seriously considering cutting Hulu loose or if this is merely posturing designed to mask the company's true intent.
