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March 6, 2024

Breakingviews: Nelson Peltz becomes gadfly to Disney’s flywheel

by Breakingviews.

Trian Fund Management might not be able to restore the magic at Disney. But the fund run by Nelson Peltz, which is nominating directors to the $210 billion firm’s board, has certainly pointed out how boss Bob Iger lost Disney’s mojo. It’s likely Trian and Peltz will still lose their bid in an upcoming vote. But in a smaller world, Peltz might deserve to get a seat.

Trian on Monday released a 130-plus page white paper including some embarrassing charts. For example, in the 10 years leading up to Oct. 6, when Peltz unveiled his most recent campaign, there have been 2,519 trading days. If a Disney shareholder bought stock on 93% of those days, shares would be less than what they paid, according to the presentation. The company’s stock has underperformed the S&P 500 Index over the past one, three, five, and 10-year periods. And between 2018 and 2023, Disney’s adjusted earnings per share fell nearly 50%, free cash flow dropped by half, and annual dividends per share cratered more than 80%.

Peltz’s ideas for fixing the company are less compelling. He wants to reignite Disney’s “flywheel”, a word that appears 19 times in the presentation. But suggestions are more backward-looking, and it’s unclear exactly what he means. Pressure to focus on margins seems stale –Peltz exhausted that gripe last year, and Disney responded. In fact, a renewed attention on costs encouraged the activist to put a prior campaign on ice, and Disney’s market value has since rebounded. That, plus some incremental decisions including a $3 billion share repurchase program and a $1.5 billion stake in Fortnite-parent Epic Games, put a notch in Iger’s belt.

Strong dynamics are also working in Iger’s favor. Other cage rattlers have piled into the stock with their own campaigns, which will likely make coalescing behind Peltz more difficult. Iger won the backing of the Disney family, who called activists “wolves in sheep clothing.” And the shareholder base is concentrated among retail investors, making it harder to create momentum.

Still, board members’ role isn’t to fix a company. They just keep tabs on the CEO tasked with that job. In that regard, Peltz has his strongest argument. Iger has re-upped his contract six times, and many of the same board members are those that failed to find a new permanent boss. Disney’s leader might not like the oversight, but the company is long overdue for it.

Context News

Trian Fund Management on March 4 published a white paper on Walt Disney as it fights to win two seats on the board in an upcoming election on April 3. Trian, which along with former Disney executive Isaac Perlmutter, beneficially holds a more than $3.5 billion position in Disney. Trian promises to fix the succession process for Disney Chief Executive Bob Iger, align compensation with performance and initiate a board-led review of the studio operations. The fund is nominating Trian founder Nelson Peltz and former Disney CFO Jay Rasulo to the board.




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