Disney and Comcast could finally be heading toward a deal to make the former the 100 percent owner of streaming service Hulu, and Wall Street analysts are tallying up possible scenarios. It is widely expected that an option to start the deal process will be triggered soon after that becomes possible on Wednesday, Nov. 1.
After all, in early September, the two sector giants amended a previous agreement, moving up the timing for when they can use put and call options from January 2024 to November. The options allow Comcast, which owns a 33 percent stake in Hulu, to force Disney to buy it out and/or Disney to require Comcast to sell the minority stake. The value of the streamer — which has 48 million paid subscribers and higher average monthly revenue per user than Disney+ — will be assessed as of Sept. 30.
The main question is the price Disney will have to pay, which has been an overhang for the Bob Iger-led company’s shares.
In their previous pact, the Hollywood conglomerates set a floor value of $27.5 billion for Hulu, which would mean Disney paying $9 billion-plus for Comcast’s stake. However, Comcast executives have signaled they expect the value to have risen since then. “The company is way more valuable today than it was then,” Comcast chairman and CEO Brian Roberts told an investor conference in September.
To help the two owners find an agreement on a price tag, each company has hired an investment bank to examine the streamer’s books and value Hulu. If the two valuations are within 10 percent of each other, the average of the two will be the price tag for Hulu. If there’s not an agreement between Comcast and Disney, a third investment bank will have to make a third determination. In that case, the Hulu price tag will be calculated as the average of the two determinations that are closest in value to each other.
Wall Street experts have started to weigh in with their Hulu deal expectations and what a transaction would mean for each sector giant.
Citi analyst Jason Bazinet suggested in an Oct. 26 Disney report that the company’s various deals being considered by Iger could see possible asset sales — including its India business and linear TV assets — pay for the takeover of full control of Hulu. “Given Disney’s agreement with Comcast, the firm is set to gain full ownership of Hulu by early 2024,” he wrote. “Our bull case implies Disney would make around (a) $9.1 billion payment, while our bear case implies about (a) $19 billion payment.”
Bazinet also touched on recent chatter that the entertainment powerhouse could look to sell a controlling stake in its India business, estimating it could be valued at about $10 billion. Assuming that Disney will retain a 30 percent stake, such a sale would bring in around $7 billion, according to the analyst.
In addition, the Citi expert estimated that Disney’s ABC network and TV stations, which Iger has said he could offload, could fetch a price tag of about $6.5 billion.
Concluded Bazinet: “Under most scenarios, the potential proceeds from a sale of the India assets and ABC are likely to offset the Hulu payment. However, if third parties ascribe a very high value to Hulu, Disney may need to use some of its existing cash to acquire Hulu.”
What does this mean for Disney shares? “Under most scenarios, we do not see much movement in Disney’s equity value from these three potential transactions,” Bazinet said. “However, a robust Hulu value we think could put modest pressure on Disney’s equity. We note, however, our analysis excludes any value from potential synergies stemming from full ownership of Hulu.”
Meanwhile, Sanford C. Bernstein analyst Laurent Yoon entitled his Oct. 25 report “Hulu auction — the range of outcomes is narrow.” In it, he detailed investor worries and estimates for Hulu and why he decided to use the word “auction” in his discussion.
“We believe there’s an overhang on Disney’s stock price due to the risk that Disney may have to pay a ransom amount to gain full control of Hulu,” he wrote of investor concerns.
“The debate is not centered on the standalone value of Hulu. Our valuation range is $32 billion-$36 billion, and we’ve encountered minimal pushback from investors,” Yoon explained. “The debate revolves around whether Disney should pay a premium on top of the standalone valuation, and the common argument is that Disney already owns 67 percent of Hulu and should not pay a premium for the remaining minority stake.”
That said, the expert noted that Comcast and Disney, in recent regulatory filings detailing the process to establish Hulu’s price tag for a deal, used slightly different language. Disney’s disclosure language did not mention a premium, whereas Comcast included a clause mentioning “a sale process designed to maximize equity value, which sale process may include a sale by auction and/or sealed bid process.”
What does that mean for a Disney-Comcast deal for Hulu? “What is included in the winning bid of an auction? Premium over other bidders,” Bernstein’s Yoon wrote. “Hence, we believe the outcome is going to be around $40 billion (assumes 20-30 percent premium to the lower end of standalone valuation range).”
The analyst also outlined the impact on Disney’s stock. “If we’re right, then the impact is less than 3 percent of equity as of market close (on Oct. 24). If we’re wrong – no premium, well, that’s even better news for Disney,” Yoon highlighted. “Either way, the modest overhang on the stock should be alleviated as the process unfolds, providing a positive catalyst, particularly if coupled with management’s guidance on the future synergies in both operations and revenue from the combined assets.”
In a September report, Wells Fargo analyst Steven Cahall argued that “a consummation of the deal is constructive to both buyer and seller.”
Commenting on the impact of a Hulu transaction to Comcast, he wrote: “The potential range to Hulu’s assessed enterprise value, net of tax, can add nicely to Comcast’s (stock) buyback but is still relatively modest versus its $185 billion market cap, i.e. Hulu is not a huge catalyst for Comcast.”
How about Disney? “The Hulu put value has been a bigger issue for Disney investors as it weighs on the balance sheet amidst direct-to-consumer losses and linear declines,” Cahall explained. “We also think Disney’s ultimate streaming strategies are held back as long as Comcast owns its third, hence the interest in accelerating the timing.”
He also commented on the likely fallout from a transaction. “While there’s a valuation at which the Hulu put is a downside to Disney, we see the conclusion as removing an overhang,” the Wells Fargo analyst said. “We also estimated $1 billion in selling, general, and administrative expenses (SG&A) synergies, so Hulu should help drive direct-to-consumer operating income improvement.”