Disney (NYSE:DIS) and Comcast (NASDAQ:CMCSA) announced Tuesday that they had reached an agreement on Comcast’s 33% interest in Hulu, the Los Angeles-based streaming service that sees Disney take operational control of the business. Disney stock barely moved on the news.
As part of the deal, Disney and Comcast have entered into a put/call arrangement that allows Comcast to require Disney to buy out its stake at fair market value; Disney can also turn around and force Comcast to sell its stake at fair market value.
The only problem?
The put/call agreement doesn’t kick in until January 2024.
In addition to the terms, Comcast has extended the Hulu license for NBCUniversal content, the Hulu Live carriage agreement for NBCUniversal channels also gets extended to late 2024, and Comcast will distribute Hulu on its Xfinity X1 platform.
So Disney and Comcast Shareholders Wait
While the agreement allows Disney to take Hulu beyond U.S. borders to other countries, Comcast isn’t obliged to put any money into the plan.
“Comcast will have the option to fund its proportionate share of Hulu’s future capital requirements, but the conglomerate isn’t required to do so. Hulu has been investing more — and losing more — over the last few years. For 2018, Hulu lost around $1.5 billion, up from $920 million a year earlier, as calculated based on the proportionate loss reported by Comcast. According to Disney, Hulu’s capital funding calls to its two remaining parents will be capped at $1.5 billion per year (and if it requires more than that, Hulu will fund that via non-diluting debt),” Variety reported.
“If Comcast chooses to not continue funding Hulu going forward, its share will be diluted. Regardless of that decision, Disney has agreed that Comcast’s ownership interest in Hulu will never fall below 21%; in other words, Disney has guaranteed it will pay Comcast at least $5.8 billion to buy out the Comcast/NBCU stake.”
Given Disney has guaranteed Hulu’s equity value will be based on $27.5 billion in 2024, should Comcast continue to fund its one-third share of any equity calls, it would receive at least $9.2 billion for its stake. In addition, Hulu can only seek a maximum of $1.5 billion annually between now and then from the two partners. This means that Comcast’s future equity contribution would be $3.75 billion should it choose to play along.
Owning 100% of Hulu makes complete sense for Disney because it gives the entertainment company total control over programming, cross-promotion of its other brands, etc.
“We are now able to completely integrate Hulu into our direct-to-consumer business and leverage the full power of The Walt Disney Company’s brands and creative engines to make the service even more compelling and a greater value for consumers,” Disney chairman/CEO Bob Iger said in a statement.
Comcast is losing a boatload on Hulu. While its participation provides NBCUniversal with another vehicle for its valuable home-grown content, I have to wonder if the losses are worth it.
In April, Hulu bought back AT&T’s (NYSE:T) 10% stake for $1.4 billion, putting a theoretical value for the entire Hulu business at $15 billion. If I’m a Comcast shareholder, I’m thinking a bird in the hand is worth two in the bush.
Disney Should Pull the Trigger Earlier
According to the agreement, NBCUniversal can end its content licensing deals with Hulu in three years. Also, NBCUniversal can run some of the content Hulu gets exclusively in one year on its OTT service in return for a reduced licensing fee from Hulu.
So, while the agreement suggests nothing will happen regarding the sale of Comcast’s 33% stake for four-and-a-half years, the fact NBCUniversal can break the Hulu exclusivity in a year indicates both parties recognize that a deal could happen well before the 2024 put/call agreement takes effect.
If I’m Disney, I would beg, borrow and steal to buy out Comcast now and not in 4.5 years because it will continue to be a sore point between the two parties. Assuming both the current estimated valuation of $15 billion and the put/call amount of $27.5 billion, Disney should offer $9.2 billion now and reap 100% of the rewards later.
As for Comcast, it has no idea what it might receive down the road. One thing’s for sure, it’s going to get very messy if Hulu pulls its exclusivity on NBCUniversal content. Better to go out on speaking terms.
Disney Should Wait?
On the other side of the fence, the reasons for waiting are two-fold.
First, content is king. Having NBCUniversal’s content for the next 4.5 years will help keep Hulu subscribers happy. Surveys suggest that Americans are willing to subscribe to as many as three streaming services. Let’s assume that Disney+, Hulu, and Netflix (NASDAQ:NFLX) are the three choices of most households. If Disney dumps NBCUniversal, it could find Hulu on the outside looking in.
The other reason for waiting has to do with Disney+. Estimates suggest the new streaming service will have 30 million U.S. subscribers and 60 million subscribers outside the U.S. by September 2024, the end of Disney’s fiscal year.
If Disney makes a move before Disney+ gains traction, it could end up with two losers instead of two winners. It’s better to maintain the status quo until the writing is on the wall for Disney+, good or bad.
The Bottom Line on Disney Stock
Disney is going into a period of serious investment, spending billions on expansions at its parks, on blockbuster films, and content for its two streaming services. As a result, the quarterly reports are going to get lumpier in terms of profits and losses, which means Disney stock will likely get a lot more volatile.
That’s a good thing.
Long-term, I believe Disney remains one of the most attractive consumer discretionary stocks to own for the long term in America.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
