There’s no question sports network ESPN is the prized possession of media conglomerate Walt Disney (NYSE:DIS). However, given that its value has never been higher, it seems sensible that the people who created Mickey and Goofy at the very least consider the network’s sale.
But who would buy it?
The (Bench) Players
Well, not News Corp (NASDAQ:NWSA), that’s for sure. It just acquired 49% of the Yankees Entertainment and Sports (YES) Network for $1.5 billion with an option to buy another 31% and majority control for $1.6 billion anytime after 2015. The Yankees, Goldman Sachs (NYSE:GS) and the rest of the network’s investors make out like bandits, achieving total returns around 500%.
And Comcast (NASDAQ:CMCSA) clearly wouldn’t be interested given its ownership of the NBC Sports Network.
Then there’s the trio of Time Warner (NYSE:TWX) and Viacom (NASDAQ:VIAB) and possibly Liberty Media (NASDAQ:LMCA) … and all three have reasons why not to do a deal: Time Warner’s in the midst of a turnaround; Viacom is controlled by Sumner Redstone, who also controls CBS (NYSE:CBS); and Liberty is probably too small to go it alone; it would need a partner.
A final possibility is Berkshire Hathaway (NYSE:BRK.A, BRK.B), which hasn’t owned Disney stock for more than a decade and certainly has the firepower to pull off a deal. Warren Buffett could always partner with someone as he did when Mars acquired Wrigley in 2008. It’s an outside possibility, but funnier things have happened.
So … what about an IPO?
Wunderlich Securities values ESPN at $40 billion, or 10 times EBITDA. Meanwhile, SNL Kagan estimates the YES Network will generate $500 million in revenue in 2012 and $250 million in EBITDA. News Corp paid 12 times EBITDA for minority ownership in the network and upwards of 15 times for control.
While the Yankees certainly are one of the world’s most valuable franchises, its affiliate fees per subscriber per month of almost $3 are 41% less than ESPN’s at $5.06 — the highest in the cable business. If News Corp is willing to pay up for the YES Network, I have a hard time believing the strongest brand in sports broadcasting couldn’t command an even higher amount — especially when you consider that sports is about the only type of programming that continues to generate growth in advertising.
Perhaps that’s why Sanford C. Bernstein analyst Todd Juenger values ESPN at $66 billion, which is significantly higher than Wunderlich’s estimate.
The only fly in the ointment is that Hearst Corporation owns 20% of ESPN — a holding it acquired in 1990 from RJR Nabisco for between $175 million and $185 million. At the $66 billion valuation, Hearst’s 20% interest would be worth $13.2 billion, or an annualized return of 21.6%. It’s possible that Disney could convince Hearst it’s time to cash in its chips and sell its 20% interest to the public. Depending on the response, it could then move to unload up to 29% of its 80% interest while still maintaining control.
The other possibility would be to spin off ESPN into a second company, with Disney shareholders getting two shares of the new company (3.54 billion shares) for every share of DIS and Hearst receiving 885 million shares for its 20% interest. It then could decide whether it wants to hang on to some or all of its position.
I realize the idea of Disney selling a portion of its most profitable business must seem extremely contrarian. However, if it went with the first proposal, ESPN’s IPO would be the fifth-biggest in U.S. history. By operating on its own, it could take bigger chances on sports programming rights, etc.
As part of Disney, ESPN is considered the sacred cash cow that must produce milk. Perhaps the rest of Disney would shape up if it knew it couldn’t rely on ESPN to save the day.
Besides, what sports fan wouldn’t want to buy — or short the crap out of — a piece of SportsCenter?
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.