Disney has bigger problems than Ron DeSantis

New York

Disney has found itself in the middle of a culture war that could result in the transfer of governance of Disney World to a board appointed by Florida Gov. Ron DeSantis. And that might be the least of Disney’s worries.

The company is facing turmoil in the media industry, declining cable subscriptions, a box office recovery, massive streaming losses, activist shareholders, possible restructuring and layoffs and escalating labor disputes with employees. That’s a lot for CEO Bob Iger.

Iger, who retired as CEO in 2020 only to be brought back in November, has remained mostly quiet about his plans for the company since his return. It ends Wednesday at 4:30 p.m. ET when he is set to open an earnings call with Wall Street investors.

What to watch for sure to be a closely watched call.

Disney’s revenue is expected to be down nearly 30 percent from a year ago despite strong theme park sales and higher revenue thanks to Avatar: The Last Airbender, which sold tickets in its two weeks in theaters late last year. earned about $400 million from According to Box Office Mojo, the year is on track to top $2.1 billion worldwide.

The financial results may be the least interesting part of the call.

“We expect Disney to introduce structural changes as well as cost reductions,” Bank of America analyst Jessica Reiff Ehrlich said.

Iger is expected to reverse the restructuring of the company’s media and entertainment division that his hand-picked successor — and now predecessor — Bob Chapek announced in 2020, though the exact structure remains unknown.

“He has to address that first,” said ref Ehlreich. “Everybody has to know what directions they’re going in.”

Along with restructuring, there may be job cuts. The layoffs are widespread across the media industry, with consumers expecting fewer advertising dollars and spending in the coming year. Disney has so far avoided any major layoff announcements.

Shares of Disney ( DIS ) have risen nearly 20 percent since Iger’s return announcement in November, outperforming the overall market but some other media companies, such as Netflix ( NFLX ) or Warner Bros. Discovery lags behind gains in the same period. owner of But, clearly, investors are eager to hear Iger’s plans for restructuring and cost cutting.

“We don’t believe one person can save the company alone, but the return of CEO Iger will force Disney to take an honest and courageous self-examination,” said a Wall Street note. What’s working and what needs to be fixed.” Research firm MoffettNathanson.

“We also expect Bob Iger to provide high-level views on Disney’s strategic positioning in streaming, current asset mix and potential levers to re-accelerate revenue growth,” Rief Ehlrich added. ”

Disney posted better-than-expected subscriber growth for Disney+ and its other streaming services in the company’s last quarterly report under Chapek in early November..

But that came at a cost of projected losses of $1.5 billion for the quarter and $4 billion for the fiscal year ending Oct. 1. Chapek said at the time that the streaming business is still “on track to be profitable in fiscal year 2024, assuming we don’t see any meaningful changes in the economic environment.”

In addition to the number of streaming subscribers Disney added during the period, investors will want to know how much it lost, any changes to the target date for when it will finally be profitable, and new customer pricing options. What are the reactions?

“Subscriber growth is driven by profitability, mostly [streaming] Services have gone into price hike mode,” Cowen analyst Doug Kreutz wrote.

Disney will likely set new targets for both profit and customer growth in Wednesday’s report and in investor comments, Reif Ehlrich said.

The idea of ​​Disney divesting ESPN has been discussed for years — since the beginning of Iger’s previous 15-year tenure as CEO.

The self-proclaimed global leader in sports is facing the same problems that rivals across the industry are grappling with: a steady, unstoppable decline in cable subscribers. ESPN charges cable operators more fees per cable customer than any other group of networks, making it particularly vulnerable to the loss of cable subscribers.

At the same time, competition for sports programming is increasing as streaming services such as Amazon begin to compete for rights packages, sending the money ESPN has to pay to increase rights fees. Must be paid for.

Various activist investors have proposed closing ESPN over the years, most recently Dan Loeb of Third Point last summer.

But Loeb soon withdrew from the proposal and a deal was struck with the Disney board. Another activist investor, Nelson Peltz, is moving forward with a proxy fight in an attempt to win a seat on the Disney board, though he has been quiet on ESPN in his proposal to cut costs at the company.

Disney scheduled a shareholder vote Monday on board seats for April, and is actively opposing Peltz and his other proposals.

But ESPN has problems spinning off, even if it raises cash and allows Disney to reduce debt. Doing so today could be an example of selling short, when the market has little appetite for a stand-alone ESPN or an obvious buyer.

That’s why Rief Ehlrich said he doubts Iger will comment on the proposal, even if it’s Wednesday, unless the idea is out of hand.

“I’d be really surprised if, with everything he has on his plate, that he’s going to turn a large part of the business around at this point,” he said.

Unionized rank-and-file workers at Disney World voted 96 percent last week against Disney’s contract offer that would have given them at least a $1 a year raise over the next five years.

The company and a group of six unions representing 32,000 union members are set to return to the negotiating table, and no strike deadline has been set. Unions are calling for an immediate $3-an-hour raise for members — a 20% increase — with $1-an-hour increases to follow in subsequent years.

Unions say the current wage of about $15 an hour is not enough to live in the Orlando area even with full-time work. The company called the rejected wage proposal “a very strong offer.”

But the last thing Iger or Disney needs is to upset the strong demand for trips to Disney World or other park locations.

Disney reported that its Parks, Experiences and Products unit, which includes Disney World and other park locations around the world, had revenue of $7.4 billion and operating income of $1.5 billion in fiscal 2022, the first continued until October, although the first six months of that fiscal year were affected by rising Covid cases.

Revenue grew by 36 percent and profit more than doubled from the previous fiscal year. And both revenue and operating profit are higher than what the company did in fiscal 2019, before the pandemic, with revenue up 12% and earnings up 10%.

The political culture wars are another headache for Iger, as Disney faces the potential loss of the powers it has to act as the governing body for the land on which Disney World operates.

It began last year when Florida passed a “Parental Rights in Education” law that placed restrictions on sexual orientation and gender identity instruction in the classroom. Opponents called the bill a “don’t say gay” law, and a group of Disney employees urged the company to use its influence as the state’s largest employer to oppose the legislation. . Iger himself, months after relaunching the CEO’s office, joined those calls.

Chapek initially tried to stay neutral on the legislation, then eventually joined the opposition.

But after the bill was passed, and the legislation’s Gov. detractors and Republican supporters targeted Disney, it eventually passed a bill to dissolve the government-like entity, known as the Reedy Creek Improvement District. , which is controlled and used by Disney. Powers like the government, which is due to come into effect in June.

This law also had its problems. As towns and counties feared they would be left with nearly $1 billion in debt, Reedy Creek sold bonds to pay for government services.

So the Florida Legislature is in special session this week to pass a new Disney law that makes it clear the company will be on the hook for $1 billion in debt. But the government-like entity, which will be renamed the “Central Florida Tourism Oversight District” from Reedy Creek, will now be kept alive but controlled by a board appointed by the governor instead of Disney.

“We are monitoring the progress of the draft legislation, which is complicated given the long history of the Reedy Creek Improvement District,” said Walt Disney World Resort President Jeff Wahle. “Disney operates under many different models and jurisdictions around the world, and regardless of the outcome, we are committed to providing the highest quality experience to the millions of guests we visit each year.”

— K Steven Contorno contributed to this report.

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