The battleground is starting to become clear heading into Walt Disney's (DIS -0.04%) annual shareholder meeting in a couple of months. Two of the activist shareholders that were challenging Disney are offering up candidates to shake up the entertainment giant's board of directors. Disney is naturally only endorsing its own slate of a dozen directors.
Disney was able to dodge a proxy battle last year when CEO Bob Iger and the rest of the boardroom worked with Nelson Peltz from Trian Fund Management to settle their differences in what turned out to be an uncontested shareholder meeting. But this time around, there will be blood.
Where Peltz has a point
Activists launching proxy battles typically have large mouths with small stock positions -- but that's not Peltz. Trian has amassed a roughly $3 billion stake in Disney. It's less than 2% of the shares outstanding but enough to make it one of the largest shareholders in the House of Mouse.
Last week, he was ripping Disney while on CNBC for putting out five consecutive theatrical releases that lost money, and it's fair to say that the Mickey Mouse company has fallen short at the multiplex lately. Last year was the first time since 2015 that Disney wasn't the leader in global box office receipts. Original properties have fallen flat, and even "can't miss" franchises have failed at the cinema.
Peltz is also justified in taking the board's corporate governance to task. Disney fumbled the succession strategy when Bob Chapek became CEO in early 2020, only to extend his contract just months before bringing Iger back to the helm. Peltz feels that Disney needs more tangible long-term goals, not just vague objectives like improving its operations of getting its streaming business to achieve profitability by the end of this fiscal year.
Disney has its weak spots. The shares have underperformed the market for three consecutive years, currently trading for less than half of the peak set 35 months ago. The targets are large, and Peltz knows where they are.
Image source: Disney.
Where Peltz misses the point
There are some duds in Petlz's quiver. He feels that Disney's direct-to-consumer business should be generating Netflix-esque profit margins of 15% to 20% by fiscal 2027. Netflix has been profitable for 20 consecutive years.
Disney is hoping that fiscal 2025 will be the first full year of Disney+ profitability. You can't ramp up a business that quickly, especially with so many moving parts, including the costly sports programming at ESPN+ and the licensing deals required to keep Hulu interesting.
Peltz feels that Disney needs to grow its theme parks and save costs elsewhere, but those goals are already in Disney's playbook. Even as Disney raises the annual savings it's hoping to achieve across its media empire, it recently announced plans to double expenditures to grow its theme park and cruise ship business over the next decade.
In the end, a proxy battle needs the majority of shareholders on its side to succeed. Peltz may have been able to pull this off two years ago when Disney was becoming a polarizing entity under Chapek, but the board brought back Iger to provide stability before things got out of hand. The stock also moved higher last year, even if it lagged the overall market.
Something as simple as resuming its dividend distributions last month should pacify some investors. The stock chart hasn't been kind, but Disney has posted healthy upticks in revenue for the last three fiscal years and continues to be the bellwether of entertainment stocks.
There may be valid knocks, but not enough to make this springtime annual shareholder meeting hostile. Disney can help its chances by embracing some of the activist rallying cries that make sense ahead of the showdown, but it's ultimately a battle that it's not likely to lose.
