Disney (DIS 0.44%) CEO Bob Iger is apparently willing to make some hard choices so billionaire investor Nelson Peltz no longer sees the need to mount a proxy battle against the entertainment giant.
Peltz's Trian Partners had taken a 9.4 million share stake in Disney in January, valued at about $1 billion, with the idea of winning a seat on the board of directors. The activist investor said Disney was "a company in crisis" that had "lost its way resulting in a rapid deterioration in its financial performance," leaving it with a "balance sheet from hell."
Image source: Getty Images.
He wanted to work with Disney to ensure Iger had a very short tenure as CEO, the company was reorganized, and its dividend reinstated.
But after Disney's fiscal first-quarter earnings report where Iger proposed a $5.5 billion cost-cutting plan, a corporate reorganization, and was considering reinstating its dividend, Peltz declared victory and said "the proxy fight is over."
Because proxy battles can be costly diversions and Peltz is known for bruising battles, avoiding a fight is smart. But with the way cleared, does this new sense of unity make the entertainment stock a buy? Let's find out.
Disney's value destruction
Disney stock trades about where it was back in 2015, and since its acquisition of 21st Century Fox in 2019 -- a deal Peltz says Disney overpaid for and blames for most of the company's problems -- the stock is down 2% compared to the 44% gain of the S&P 500 index.
The entertainment stock also lags in total shareholder return over virtually all time frames, not only in comparison to the index, but to its peers as well.
According to Peltz, Disney trails its peers by 24% over the past year, 60% over the last three years, 66% over five years, and lags its rivals by a whopping 371% over the past decade. So Peltz might not have been wrong that change was needed.
NYSE: DIS
Key Data Points
Disney has since announced it will:
- Fire 7,000 workers, or 3% of its workforce
- Cut $3 billion from its content budget in areas other than sports, as ESPN was made into a stand-alone unit
- Restructured the company into three divisions to improve profit margins
- Reinstate a modest dividend by the end of the year
Iger has also suggested he's open to selling off its investment in Hulu rather than try to buy out Comcast's ownership stake because, as he told CNBC, he was "concerned about undifferentiated general entertainment."
Image source: Disney.
Starting from scratch
To make the budget cuts work, Disney will slash $1 billion from its marketing budget by focusing on specific movies and TV shows. It will also control how much it spends on those shows as they've become "extraordinarily expensive."
While the dividend was halted in 2020 after 57 years because of the pandemic, Peltz has suggested it was really because of the Fox deal. Disney's free cash flow had deteriorated while its leverage had dramatically increased. When the crunch came, Disney couldn't afford the payout anymore.
Peltz is certainly happy, telling CNBC, "Management at Disney now plans to do everything that we wanted them to do," though it was expected Iger would be announcing cost-containment measures regardless.
Still a mountain of troubles ahead
Yet Iger still has a difficult road ahead of him. The Disney+ streaming service is starting to lose momentum. The total Disney+ service, including Hotstar, lost a net 2.4 million subscribers in the first quarter -- its first drop ever. While the service's first-quarter operating loss narrowed to $1.1 billion from $1.5 billion in the fourth quarter of 2022, it remains a significant money-losing operation.
The success of Iger's plan is still to be seen, and while the market responded well to the report, with Disney stock up 23% year to date, many of its current difficulties are the direct result of Iger's prior tenure. Ex-CEO Bob Chapek is just the one who bore the brunt of the fallout.
Because the market has already priced much of the good news, investors may want to wait for tangible results from this plan before jumping into Disney stock.
