Disney investor Third Point calls for “board refresh”, Hulu integration & ESPN spin-off

New York-based hedge fund Third Point has taken a stake in Disney with a demand for sweeping changes including spinning off ESPN, integrating Hulu into Disney+, board changes and cutting costs.

In a letter to Disney boss Bob Chapek, Third Point’s chief executive Dan Loeb congratulated the Mouse House’s chief on “a terrific quarter” and in particular on “the strength in DTC subscriber growth” in a period that saw Disney overtake Netflix as the world’s largest streaming company.

However, Loeb said that Third Point had “filed Hart-Scott-Rodino approval with the Federal Trade Commission so that we can engage with management and the Board in order to work directly and constructively with all parties, since the company will likely require additional strategic, capital allocation, and governance changes to ensure its success”.

The changes the activist investor is demanding include the integration of streamer Hulu “directly into the Disney+ DTC platform”, which Loeb said would “provide significant cost and revenue synergies”.

“We urge the Company to make every attempt to acquire Comcast’s remaining minority stake prior to the contractual deadline in early 2024,” said Loeb in his letter. He said it would be acceptable for Disney to pay “a modest premium” to achieve this goal but noted that Comcast, which holds a 33% stake in the streamer, “may have an unreasonable price expectation at this time”.

Regarding ESPN, Loeb argued that despite the free cash-flow generated by the sports broadcaster and streamer benefiting Disney, and the latter’s strategy of combining Disney+ and ESPN in a combined offering, the two would be better off parting ways.

“We believe that a strong case can be made that the ESPN business should be spun off to shareholders with an appropriate debt load that will alleviate leverage at the parent Company,” he said.

Loeb claimed: “ESPN would have greater flexibility to pursue business initiatives that may be more difficult as part of Disney, such as sports betting” while customers and sports leagues “would be better served by a focused management team driving a leadership position in sports distribution”.

He said that the two could continue to have a close relationship to their mutual benefit on a contractual basis and suggested that spinning off ESPN would also “attract shareholders seeking the respective qualities of each company”.

In addition to integrating Hulu and spinning off ESPN, Loeb called for Disney, whose costs he said “are among the highest in the industry” to embark on cuts to improve margins and dispose of “excess underperforming assets”.

Loeb also called for a “board refresh” at the company to bring in new members who could “fill gaps in talent and experience that must be addressed”. He said that Third Point had already “identified potential board members who we believe would make essential contributions to the Company’s Board at this critical time”.

Third Point reportedly has essentially recreated a stake it previously held in Disney two years ago, worth about $1bn.