June 17, 2021

Breakingviews: Disney has enough magic without Hulu

by Breakingviews.

Walt Disney’s streaming service Disney+ is rocketing ahead, with big names and big audiences. So it makes ever less sense that the U.S. media colossus also owns a majority stake in less successful video streamer Hulu. While Disney can buy out minority partner Comcast in a couple of years, it might be better off selling Hulu instead.

The broadcaster of “The Handmaid’s Tale” is an odd fit for Disney. The Mouse House initially had one-third of Hulu, which grew to two-thirds, plus operational control, when it bought parts of Fox in 2019. Comcast owns the rest. Disney boss Bob Chapek can take full possession of Hulu in 2024, and Comcast can require it to do so, with a minimum valuation set at nearly $28 billion.

What started as a joint venture is potentially now a distraction. Sure, Disney can bundle Hulu along with Disney+. But Hulu represents only a quarter of Disney’s total direct-to-consumer subscribers of 160 million. And when it comes to international expansion, Chapek’s firm is clearly banking on Disney+ rather than its poor cousin.

Buying out the minority share in Hulu would cost Disney money without bringing obvious benefits. Assume that Hulu accounts for around 50% of Disney’s projected streaming sales for the 2021 fiscal year of nearly $17 billion, according to Refinitiv – reflecting that Hulu is a quarter of Disney’s total streaming subscribers but brings in more than twice as much revenue per average user. Put that on the same 7-times multiple on which Netflix trades and Hulu could be worth more than $60 billion.

What if Chapek offered to sell instead? If Comcast were to buy the majority of Hulu, it might leave Disney with $40 billion to spend on high-impact Disney+ content like “Loki” and “The Mandalorian.” Comcast boss Brian Roberts could use Hulu to boost Peacock, its own streaming service currently similar in size to Hulu – and the extra borrowings would still leave Comcast with net debt below four times its EBITDA.

For now, neither company has suggested it plans to deviate from the pre-agreed script. But shareholders on both sides might rather see Disney save its money for its own, superior streaming service, and Comcast’s own sub-scale platform get a decent boost. It’s a fantastical ending, but that doesn’t mean it wouldn’t be a happier one.

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BREAKINGVIEWS

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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