The unthinkable is now being talked about on Wall Street: Disney should spin off ESPN to help Disney's stock valuation

Wall Street is now openly suggesting that Disney should sell-off ESPN
The unthinkable is now being bandied about by many Wall Street analysts these days: What if Disney spun off ESPN to help its stock valuation?

Investors have been looking to Disney CEO Bob Iger to stop the hemorrhaging
at ESPN for well over a year to no avail
The proposal has been formally suggested by Royal Bank of Canada (RBC) Capital's Steven Cahall, who believes the year-to-date underperformance of the Walt Disney Company has been due to investor discomfort around the woes at ESPN.

It's an idea that's previously been unthinkable because ESPN has been Disney's cash cow for the last five years, fueling Disney's meteoric growth, but in recent years, the loss of subscribers from cord-cutters has weighed heavily on the minds of investors and has severely impacted Disney's growth.

ESPN, by itself, accounts for approximately 30% of Disney's operating income, but neither it nor ABC television networks have been very synergistic to the rest of Disney's business operations (i.e., movie studios, theme parks and resorts, consumer products and interactive media, etc.), and in recent years, the media networks division—the most profitable division at Disney—has fallen into a major slump that has bogged down Disney's top and bottom lines.


What's worse, Disney has had no solutions to stop the continuing hemorrhaging from its media networks division.

Steven Cahall of RBC Capital is openly suggesting that Disney
spin-off ESPN
ESPN networks has lost more than 621,000 subscribers in the month of October alone. ESPN's Monday night football has suffered a 17% decline in ratings this season, according to data from A.C. Nielsen. And ABC networks is continuing a ratings decline of eleven percent for the season, year over year.

What's worse, Disney shares have certainly lost their sparkle this year. The stock is headed for its worst performance since 2008, snapping a four year rally in which the price of the stock nearly tripled.

The reversal of fortune at Disney has kept many shareholders restless these days, waiting to see how Disney Chairman and CEO, Bob Iger, would respond to turn around the fortunes of its slumping media networks division, which has also now dragged down it's other business operations this year—save for it's movie studios.


The voices for spinning off ESPN from Disney on Wall Street have been growing in recent weeks as stagnation in the media networks division has most certainly stunted the company's stock valuation and opportunities for growth. What's worse, it has cast Disney as a big loser among investors on Wall Street.


Separating ESPN from Disney—or even the media networks division altogether—would not only lift the companies stock valuation, but some would argue it would also make it easier to find a successor to outgoing CEO, Bob Iger, who is planning to retire in 2018.

Liberty Media Chairman John Malone first suggested Disney spin-off ESPN so
that Disney could itself be bought off by a bigger company, like Apple
A more streamlined Disney certainly would be easier to manage and would be more attractive to potential CEO candidates who are thinking about taking the job.

Both Tom Staggs, Iger's previous heir apparent, and Stagg's rival inside Disney, CFO Jay Rizulo, stepped down from Disney's C-suite after a bitter runoff for the top spot when CEO Bob Iger first announced he would eventually retire in 2018.

Rizulo lost the battle to Staggs for the heir apparent title and left vanquished in 2014, but Staggs himself abruptly quit in 2015, a year after, when questions arose from Disney's board whether he could competently run the Walt Disney Company after Bob Iger. One problem that the media networks poses is that it makes the Walt Disney Company a much more complicated business to run.

Divestiture from ESPN could be beneficial for Disney in other ways. For one, splitting off ESPN could put Disney into play for a possible merger with a bigger company, like from Apple, as media billionaire dealmaker John Malone of Liberty Media suggested earlier last month.


The cash from selling off ESPN could also be used by Disney for a big play in its own acquisitions, investments and stock repurchases.

Is it time for Disney to cut loose its slumping media networks division?
Disney currently has no major growth catalyst to excite investors about, so Disney stock performance is expected to disappoint again in 2017. Clearly investors are looking for Disney to make a big play somewhere to get out of the quagmire.

The big question is: Will Disney actually sell off ESPN?

It's hard to tell because, by selling off ESPN, Disney would effectively get rid of the "goose that laid the golden egg;" however, by not doing anything as they have been doing the past year, ESPN's slumping numbers will continue to weigh down on the rest of Disney's business operations.

It's a problem with no viable solutions and not an enviable position to be in.


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