Nine is the magic number, though Hulu may be worth more.
When asked whether Comcast was intending to sell its one-third stake in Hulu to Disney, Comcast’s CEO Brian Roberts stated that he believed “it will end up happening”.
In a recent SEC filing by the Walt Disney Company that amended the deadline of the company’s original “put/call” agreement regarding NBC Universal’s 33% ownership interest in Hulu, Comcast—parent company to NBCU—can exercise its “put” option and require Disney to purchase its stake in Hulu, or Disney can exercise its “call” option to require Comcast to sell its 33% stake in Hulu to Disney at a value based on NBCU’s equity ownership at either a guaranteed floor value of $27.5 billion or at fair market value, beginning September 30, 2023.
Disney and Comcast have both reportedly hired investment banks, JPMorgan Chase and Morgan Stanley, respectively, to determine the equity fair value of Hulu. If the valuations are not within 10% of each other, the banks must then select a third investment bank to make an additional determination, taking the average of the two determinations that are closest in value to each other, according to the SEC filing.
The appraisal process will take into account Hulu’s historical financial and operating results, based solely on audited financial statements, as well as Hulu’s future business prospects and projected financial and operating results, among other relevant factors.
Roberts also believes that Hulu is more valuable than $27.5 billion today than it was back then.
“You might say, what are we going to do with the proceeds of this? And let me just say on that, we’ve been asked out a lot as well. Our plan is to return it to shareholders,” Roberts said at the Goldman Sachs Communacopia + Technology Conference.
Does Disney Even Have $9 Billion—Or More—To Hand Over?
With the appraisal process gearing up and Disney’s fourth quarter earnings set to be released after the close of regular trading on November 8th, is Disney ready for the deal?
The streaming business for many direct-to-consumer platform providers is relatively new and still competing with linear programming. While there has been considerable growth in recent years, Disney’s CEO, Bob Iger, doesn’t think it is compelling enough to quickly maximize profitability in the near future.
Initially erring on the side of caution when considering the Hulu transaction, the CEO stated that he would be “studying the business very, very carefully” along with eyeing other competitive dynamics.
“It’s a solid platform. And it’s also a very attractive platform for advertisers. It’s already proven to be valuable for them and advertising has proven to be valuable for us. But, the environment is very, very tricky right now. And before we make any big decisions about our level of investment, our commitment to that business, we want to understand where it could go,” Iger said at the Morgan Stanley Technology, Media and Telecom Conference earlier this year.
The Verge suggested that Disney may be “strapped for cash” ahead of the transaction, reporting a slowdown in subscribers across Disney’s direct-to-consumer segment, along with its lackluster cash position.
But Disney’s upcoming earnings results and subscribers’ growth trajectory could prove otherwise, with Disney’s Interim CFO, Kevin Lansberry, voicing optimism about the upcoming deal during last quarter’s earnings call.
Revenue
The company reported revenues of $22.3 billion in Q3, a 4% increase from the prior year.
Additionally, Disney’s DTC revenues increased 9% to $5.53 billion in the third quarter from $5.06 billion, while both Disney+ and Hulu reported subscription revenue growth, which were attributed to an increase in Disney+ Core retail pricing and subscriber growth in both platforms, as well as lower marketing costs partially offset by higher programming and production costs in addition to lower advertising revenue.
Cash Flow
Disney also generated $1.6 billion in free cash flow in Q3. That, in addition to the company’s strong single A credit rating, progress made towards deleveraging efforts, and a recommendation to the board of directors to distribute a modest dividend, the company believes its current position can sustain the deal.
“We’re very comfortable with our current liquidity position. We’ve got about $11.5 billion of cash on our balance sheet and about $10.5 billion worth of revolving credit facilities and commercial paper – and we’re going to have plenty of future cash flow to help fund all of this going forward,” Lansberry said. “We’re prioritizing free cash flow as a company. And we’re being really disciplined and smart about how we go about allocating capital across the company.”
Savings
In an effort to target $5.5 billion cost savings across the company, Disney also reduced its total worldwide headcount by 3.2% during the second half of the year, with plans to cut $2.5 billion of non-content spending and decrease content spending by $3 billion. Along with key structural changes within the company, this will create a more cost-effective, coordinated, and streamlined approach to operations, according to Iger.
“I’m pleased with how much we have gotten done in such a short period of time, but I also know we have a lot more to do,” Iger said. “As I’ve said before, our progress will not always be linear. But despite near-term headwinds, I’m incredibly confident in Disney’s long-term trajectory because of the work we’ve done, the team we have in place, and because of Disney’s core intellectual property foundation.”
Disney’s Road To Profitability
Combining both Disney+ and Hulu will now be the added boost needed to strengthen audience engagement and advertising, which is a different spin on Iger’s initial sentiment.
“I spent a lot of time looking at that as part of the future of our streaming business, and ultimately concluded that we would be better off having Hulu than not having Hulu,” Iger said in a CNBC interview with David Faber.
Subscriber Growth
Disney reported net losses across its domestic paid subscribers, offset by a 2% increase in its international subscriber base from the prior quarter, for an overall 1% increase across Disney+’s Core subscribers.
The company is expecting to see Disney+’s Core subscriber count rebound both domestically and internationally in Q4.
However, attracting subscribers is just one piece of the puzzle.
Pricing Strategy
Disney will also need to carefully strategize its pricing model, seizing opportunities to leverage its differentiated platform to pursue an aggressive pricing structure where it can, while still maintaining a level of accessibility among consumers to support sustained growth in paid subscribers.
The company announced during the Q3 earnings call, that it would be hiking prices for Disney+, Hulu and Hulu + Live TV, ESPN+, and The Bundle, while pricing for standalone ad-supported Disney+ and Hulu offerings would stay the same.
Beginning October 12th, the price for Disney+ rose 27%, from $10.99 to $13.99 for domestic consumers, while Hulu without ads rose 20%, from $14.99 to $17.99/month, according to Variety.
Monthly pricing for two Hulu + Live Packages also increased by $7, with international expansion of Disney+ ad-supported plans starting November 1. By December 2023, the company will increase subscription prices of Disney+ without ads in those markets while also cracking down more heavily on password-sharing.
Monetization and Distribution
Content Sales/Licensing and Other revenues declined slightly by 1% to $2.08 billion from $2.11 billion in Q3. On the other hand, advertising revenue per-subscriber was favorable in Q3 across domestic Disney+, Hulu SVOD, and Hulu Live TV + SVOD.
“In Q4, we expect DTC ad revenue to continue to benefit from higher advertiser demand at Hulu as well as from the ramp-up of the Disney+ ad tier,” said Lansberry.
And with over 3.5 billion hours of adult animation content being consumed on Hulu, with more than 33 seasons of The Simpsons already on Disney+, third party content licensing opportunities could open the door to more revenues in the future.
In a different interview, Comcast’s CEO Brian Roberts stated that there is 2-3 times more engagement on Hulu than on any other streaming platform, based on Nielsen stats, with exception to Netflix.
“I do believe that we’d have to have full ownership of Hulu to integrate it into Disney+. We would love to get to the endpoint earlier, but that obviously takes some level of propensity for the other party to have reasonable terms for us to get there. And if we could get there, I would be more than happy to try to facilitate that,” Iger said at the Goldman Sachs Communacopia Conference.
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