3 Reasons Disney Should Divest ESPN

RBC Capital’s Steven Cahall believes the year-to-date underperformance of Walt Disney Co DIS shares, despite the strength in non-media, suggests continuing discomfort surrounding ESPN.

Cahall maintains a Sector Perform rating on the company, with a price target of $101.

Value Creation

Walt Disney’s EBITDA has been growing at a robust CAGR of 10.2 percent over the last four years, driven by CPIM, parks and studio, in turn driving the company’s EV to realize a CAGR of 12 percent.

However, the analyst believes ESPN’s EBITDA CAGR of -3 percent “has almost single-handidly de-rated DIS by ~3.5–4x EV/EBITDA turns from ~12x at the start of FY13 to ~8.5x today.”

Cahall believes divesting ESPN would improve the company’s growth rate, while pricing assets more efficiently.

Why Divest ESPN

The analyst said there could be several value-creating elements from the divestiture of ESPN, such as “(1) valuation upside to the non-ESPN business based on the overhang; (2) splitting off ESPN might arguably put DIS more “in play” for M&A; and (3) monetizing ESPN would put cash on the balance sheet that DIS can use for acquisitions, organic investments, or share repurchases.”

Cahall pointed out that Walt Disney’s strength lies in investments that tie parks, movies/shows and products, rather than sport.