Breakingviews: Disney clash with activist Peltz will have sequel

Activist investor Nelson Peltz often plays a long game. So his truce with Walt Disney last week, after a short bid to get a seat on the media group’s board, might seem uncharacteristic. But earlier battles at Dupont and Procter & Gamble suggest that such plot twists aren’t out of the ordinary, raising the possibility that Peltz may still get what he asked for.

Disney Chief Executive Bob Iger unveiled $5.5 billion of cost cuts last week when the $200 billion theme-parks-to-streaming company released fourth-quarter earnings. On the face of it, that was enough to get Peltz, who had complained about Disney’s over-the-top compensation practices and “lack of overall cost discipline”, to call off the dogs. “The proxy fight is over,” a spokesperson for his outfit Trian Fund Management told Reuters. Disney said it appreciated the decision.

The problem is that Peltz has only gotten half of what he typically wants. The New York-based activist carries a mug around his office that reads “sales up, expenses down.” Yet the challenge of getting Disney’s top line to grow faster, which Peltz sketched out in a presentation on a now-unavailable website “restorethemagic.com”, hasn’t been fully addressed. While revenue of $23.5 billion in the first fiscal quarter of the year was 8% higher than the previous year, subscribers on Disney+, the group’s streaming product, fell slightly. Revenue in the division that runs Disney’s traditional TV networks, like ABC and sports channel ESPN, was down 5% compared to the same quarter the previous year, to $7.3 billion.

Fixing this is far from simple. Disney+, the streaming business, faces serious competition from Netflix. Overall, Iger’s firm burned more cash last quarter than it did a year earlier. True, Iger has options. A sale of ESPN has been suggested by another activist, Dan Loeb. Nor has Iger ruled out a sale of Hulu, another streaming platform in which Disney owns a 66% stake. For now, Peltz is apparently leaving Iger to decide whether shrinking is the best way to grow.

What makes this harder – and where Peltz could have made a difference – is that Disney’s governance is poor. Iger still needs to find a replacement for himself. Though he has agreed to leave after two years, Disney has a bad track record when it comes to succession. Iger’s previous stint as CEO saw him postpone his retirement four times, move to a new role as chairman, and then come back to his old job when successor Bob Chapek was ousted.

Granted, Peltz has already won enough at Disney to justify cooling his jets. The company’s decision to slash costs was significant, and it gives him an easy victory. The company’s shares are up 25% year-to-date. On one hand that means Peltz is likely to have made a handsome return. On the other hand, he ran the risk of losing the proxy fight had he pushed much further, since shareholders have less to complain about than when he started. Winning, visibly, is something activists like Peltz really care about.

For Disney shareholders still glum about the company’s performance – its shares are up 3% over the past five years, where the S&P 500 Index is up 50% – there’s still hope. Peltz’s history shows he doesn’t need to be in the boardroom to shake things up. One example is chemical maker DuPont. Peltz first revealed a stake in 2013 and two years later made a bid to get onto the board during the shareholder-meeting flurry that U.S. companies call proxy season. He lost. But he held on to the stock and pushed from the sidelines, and ultimately got what he wanted: the return of chieftain Ed Breen and a merger with Dow.

There’s also Peltz’s high-profile war with P&G. An acrimonious bid for a board seat at the household-product maker ended in failure after shareholders voted against him – or so it seemed initially. A recount suggested he had won, and the company began to challenge this new result – but then folded and named him onto the board anyway. Even after all that, then-CEO David Taylor worked closely with Peltz to reshape P&G. A few years ago both executives joked in a CNBC interview that they were buying furniture together.

Could Peltz still end up on the Disney board? It’s not out of the question. His battle with the Magic Kingdom would have been an early test of a new voting arrangement for U.S. companies, whereby activists’ nominees for board seats can appear on the same voting card as the company’s own choices. Previously, shareholders had to pick between one slate or another. Disney is still a tough fortress to storm, because of its disparate shareholder base and much-loved, all-American brand – but if it turns out that the “universal proxy” hands successes to activists in other firms this season, it may give Peltz an opportunity to revive his boardroom quest later.

For now, looking like a team player isn’t a bad thing for the seasoned cage-rattler. Other activists too are increasingly trying to go friendlier routes – Bill Ackman has said he is trying to work in more collaborative ways with the companies he targets. Calling a truce based on Disney’s efforts burnishes a reputation for being reasonable, whereas losing a proxy fight might have had the opposite effect. But if Disney’s performance doesn’t improve, the Mouse House probably hasn’t heard the last squeak from its uninvited guest.