Source: PaxForex Premium Analytics Portal, Fundamental Insight
Dan Loeb has changed his mind about ESPN. In August, the activist investor wrote a letter urging Walt Disney CEO Bob Chapek to separate the sports media company. But after Chapek spoke at Disney's annual D23 conference and talked to reporters about ESPN and Disney's future, Loeb is now convinced that ESPN is worth more as part of Disney.
Many always thought ESPN was of greater value to Disney. Chapek was quick to change the mind of a very active activist investor, and that should make us more excited than ever about the prospects for Disney and its streaming strategy.
Disney is increasingly focused on streaming. And it's focusing more and more on sports. Amazon, Apple, and others have recently made big deals to acquire sports streaming rights.
In fact, Amazon claims that its deal for Thursday Night Football is already paying off after the first exclusive broadcast garnered more Prime subscribers in the United States than any other three-hour period in history. And that's despite the extremely high level of TV distribution among American families.
ESPN owns a huge amount of valuable sports rights, most of which involve streaming in some way. The company has included streaming rights in its contracts with sports leagues for years, but a few years ago it made it an even more important part of its negotiations.
Importantly, ESPN can pay for all these sports rights and remain profitable, and with positive cash flow. Amazon and Apple use sports as a loss leader to attract customers to their broader ecosystems. Not surprisingly, ESPN is seen as such a valuable asset by many suitors.
In addition, there are additional opportunities for ESPN and its strong brand. For example, sports betting is becoming legal in more and more states, and ESPN could go so far as to acquire or run its own gambling business. With a built-in marketing channel and the ability to offer "prop" bets on various aspects of the game during broadcasts, it could generate additional revenue along with increased viewership (and the ad revenue that comes with it).
After Loeb published his letter, Chapek said he received at least 100 offers to buy ESPN. But it's one thing if some other company sees value in ESPN; it's another to unlock that value by improving the business or finding synergies with an existing business.
Chapek hinted that Disney has plans for both. In fact, he told Variety that Disney has a strategic plan for how ESPN will fit into the company over the next 100 years. It's unclear if that vision has been communicated to Loeb, but Chapek said Disney would hold another investor day at some point where it will offer investors a look at the plan.
While ESPN would have tremendous value as a stand-alone company, it could play an important role in Disney's growth. Here are some of the three benefits that could help keep ESPN as part of Disney, and there are probably many more.
Positive cash flow could help fund other investments in Disney. The media company is currently investing in streaming content, but it needs cash flow from ESPN and its park business to fund those early days while it builds its subscriber base. Disney doesn't expect Disney+ to be profitable until 2024, and positive free cash flow will likely come much later.
ESPN's leadership in sports means the company has one of the most valuable advertising resources in the world. As Disney moves toward more advertising on connected TV with Disney+ versions and the Disney package, it will be able to make a better offer and offer better guarantees to marketers with ESPN's valuable advertising inventory on hand. This will raise ad prices for Disney's streaming services.
It's a small but important part of the streaming package. Ultimately, Chapek wants to combine all three Disney streaming services into one system. As mentioned, Amazon's and Apple's experiments with sports show that this could be a major factor in subscriptions to Disney's streaming services.
These factors suggest that ESPN is more valuable within Disney than as a stand-alone company or part of another media company. Chapek's comments and Loeb's change of mind suggest that there may be much more to ESPN than what lies on the surface. And it makes it all the more exciting to wait to see what Disney plans to do with the sports giant.
As long as the price is below 100.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 97.80
- Take Profit 1: 95.00
- Take Profit 2: 90.00
Alternative scenario:
If the level of 100.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 100.00
- Take Profit 1: 104.00
- Take Profit 2: 108.00
