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Disney’s Proxy Fight - Trian Fund Management vs. Bob Iger
If you have been following the internet and media industry, it would be hard to ignore the high-profile proxy battle between Nelson Peltz’s Trian Fund Management and Disney announced this week. Proxy fight is a costly campaign that shareholders convene with other shareholders to use their votes to force the management and the board of directors to make changes within the company. Peltz has a reputation for criticizing consumer companies publicly and can be ruthless in getting what he wants. He had his success at Procter and Gamble and Heinz, but this time it has been an uphill battle because he is up against Bob Iger, the man who brought together the Disney Kingdom piece by piece over 20 years of tenure. Timing is also bad as it happened shortly after Bob Iger’s return after firing the previous CEO for underperformance. If the campaign was targeting the previous CEO Bob Chapek, the chances of success would have been much higher. With Bog Iger overruling all the unsustainable growth strategies implemented by the ex-CEO, the market has been patient with Iger without feeling the pressure to force a management change right now.
While the proxy fight is still early stage, we don’t anticipate it to have a meaningful impact on the share price. In the short term, the stock will still be heavily impacted by quarterly earnings scheduled on Feb 8. After going over the materials, we think the chances of success are low. Our key questions are around timing and Peltz’s lack of track record in operating media companies. We also disagree with his strategy of slowing down investing in streaming. We believe Disney HAS to continue investing in streaming, and they are already falling behind Netflix in many ways. No doubt Disney needs to change, but the low-hanging fruits like cost cutting, changing CEO, and refreshing the board have already taken place. The problem is how to grow streaming efficiently, leveraging its IP and content matrix. It’s hard for us to see how exactly Peltz will add value on that topic.
Dial back for the context, please? Earlier this week, Peltz announced a campaign called “Restore the Magic” where he publicly criticized the company’s underperformance and demanded a board seat to help improve shareholder value. In his investor presentation, he pointed out that DIS stock has been underperforming S&P over an 1 - 3- 5- and 10 year basis, and share is trading at 8 year low. Three key criticism around Disney are: 1) Inefficient capital allocation - $162B spent on M&A, capex and content has cut EPS in half 2) Poor cooperate governance - bloated management compensation and poor succession planning 3) misaligned corporate strategy anc operations - unprotiable DTC strategy despite reaching similar revenues.
Disney’s problem: unsustainable growth at deep profitability loss
A simple look at the income statement reveals that Disney is in big trouble. Despite a reasonable revenue growth rate at first glance, the company has been over-earning in domestic parks to subsidize streaming loss, which is highly unsustainable as a growth strategy. Domestic park price was raised the price by 40% over the 3 years to cover up losses from the streaming business, compared to a close to GDP rate price appreciation in the past. This led to concerns about the sustainability of growth and was widely criticized.
Despite rapid user addition, Disney has not yet figured out how to grow its streaming business efficiently. In the chart above, we showed a side-by-side analysis that shows Disney’s inefficient content strategy compared to Netflix. Despite being at a similar scale, and with stronger IP content, Disney is burning more money to achieve the same level of growth. Corporate action is also disappointing. The company has been TOO slow in rolling out the advertising layer and lost the first-mover advantage to Netflix by two months.
Cost structure is also bloated. COGS and OPEX has gone up significantly over the past 4 years, and EBITDA margin contracted by a jaw- dropping 20%. The company’s ambition to catch up with Netflix on streaming has led to a huge cash burn of $10B per year. Huge content amortization cost and customer acquisition cost ate into the operating profit line. On capital allocation front, the company also overspent on the FOX acquisition where they paid over $70B, making it one of the biggest media deal in the history.
It’s undeniable that changes need to happen at Disney. We argued that this is not a good time to pick up a public fight with Disney after Bob Iger’s return. This is especially true considering a few short months ago, Disney just gave out a board seat to ThirdPoint, another activist investor, to help implement operational changes. Based on public record, Peltz did not buit a huge position before announcing the campaign, which was a typical practice for activist investors. We think this might tie to his $800mm investment in 2021 and Peltz is now trying to figure out different ways to juice up return.
Given the market correction, Disney proxy fight can also just be an alarming signal to investors and operators alike - M&A and activists are coming. Investors demand better corporate governance and operational control under the new macro background.
(Exhibits source: Trian Disney Report)
Chart of the Week in the Public Market:
Market recovered from previous losses in response to the CPI print. CPI came in at 6.5% , in line with the expectation. Services, commodities are trending down which lead to the “goldilocks” narratives and recovery in market sentiment. We think the rebound is short-term and driven by shorts covering.
Slight moderation down from 8.9x to 8.5x - Insurtech actually has been up 11% YTD and now hovering around 1.2x EV/Rev. Interestingly, we are observing a trend of Consumer outperforming Enterprise across broader industries and within Fintech. B2B Payment is the one holding back somewhat whereas Consumer Fintech is bouncing back.
Index was volatile during the week but held up relatively wow at 2.7x. Marketplace and E-Commerce are taking the lead in terms of the rebound magnitude, whereas Gaming is lagging the industry. As we’ve stressed in this channel, cycles normally come in a sharp decline in Consumer, but Consumer also leads the recovery / upward climb out of the cycle. It’s too early to call that we are coming out cycle, but interesting to see some strong movement in the sector.
(Market data as of 1/13/2022, source: Bloomberg, CapIQ. See index composition at the bottom)
Chart of the Week in Private Market
(Deal data as of 1/15/2022, source: Pitchbook. Defined as - Series B+ global growth stage deals)
As expected, the pickup during the last few weeks of 2022 was quickly faded into the long winter slowdown. Since data is lagging industry announcements by a good distance, we will really see Jan momentum in the late-Jan/early-Feb private market tracker. Whether the deal volume will be back or not, one thing we can be sure of is that the prices have certainly gone down and will not be anywhere near 2020-2021 highs anytime soon.
Sources: Software Index: over 200+ public companies / Fintech Index: V, MA, PYPL, SQ, BILL, ADYEN, SHOP, LSPD / Consumer Index: ABNB, BMBL, CHWY, CVNA, DASH, DHER, DKNG, DUOL, ETSY, FB, GDRX, GOOGL, MTCH, NFLX, PINS, POSH, PTON, ROKU, SFIX, SNAP, SPOT, UBER, W. Please feel free to ping us for further detailed breakdown