Disney, as expected, is going all in for Hulu.
A day after the streamer co-owned by Disney and Comcast formally went on the market, Disney said Wednesday that it plans to acquire the remaining 33% stake in Hulu it doesn’t own from the NBC Universal parent for an expected price of $8.61 billion.
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Disney said the $8.61 billion represents NBCU’s percentage of the $27.5 billion “guaranteed floor value” for Hulu that was established when Disney and Comcast entered in to their 2019 agreement , “minus the anticipated outstanding capital call contributions payable by NBCU to Disney.”
That said, Hulu’s equity fair value will be assessed as of September 30, 2023, Disney said, and “if the value is ultimately determined to be greater than the guaranteed floor value, Disney will pay NBCU its percentage of the difference between the equity fair value and the guaranteed floor value.
It’s unclear when that appraisal process will be concluded, but Disney said it should be some time in 2024.
In September, Comcast CEO Brian Roberts called the initial minimum valuation of $27.5 billion “just a hypothetical,” suggesting the final price tag could be much higher. Citing Nielsen data, he said engagement on Hulu is “two to three times” that of rival streamers, save Netflix.
Both sides had been public about wanting to get a deal done, and the timeline had recently been accelerated. In early September, the two media giants said they’d modified their Hulu agreement to enable the expected buyout of the streamer to launch on September 30 instead of January, 2024.
The multi-appraiser process will see Disney pay the $8.61 billion to Comcast by December 1 as the parties conduct a fair market value analysis that likely will see the final price rise.
Disney assumed full operational control of Hulu in 2019 as part of a put/call agreement with Comcast. It meant Comcast could force Disney to buy NBCUniversal’s interest in Hulu, or Disney could require NBCUniversal to sell that interest to Disney for its fair market value at a future time, set then at January before moving up to Sept. It stipulated that Hulu’s fair market value will be assessed by independent experts but Disney had guaranteed a sale price for Comcast that represents a minimum total equity value of Hulu at that time of $27.5 billion.
In an August SEC filing, Disney said: “The Company and NBCU have been conducting a confidential arbitration concerning the parties’ rights and responsibilities under the Hulu limited liability company agreement. The Company expects a decision in that arbitration within the next quarter. The outcome of the arbitration is uncertain and we cannot reasonably estimate the amount of any potential loss or the impact on the determination of the value of Hulu’s equity pursuant to the Hulu limited liability company agreement and thus the amount we may be required to pay to acquire NBCU’s interest in Hulu.”
Hulu debuted in 2008, as a partnership between Disney, NBC Universal and 20th Century Fox. Time Warner also acquired a 10% stake but eventually sold it back to Hulu. Fox’s piece went to Disney when it acquired most of the entertainment assets of 20th Century Fox in 2019. Hulu includes the various tiers of the streaming service (with and without ads), Hulu Plus Live TV and Disney also offers it bundled with Disney+ and ESPN streaming services.
It’s a hefty payout for Disney but one that Bob Iger has decided is strategically key.
Since his return Disney’s helm almost a year ago, the CEO has made streaming the company’s grail while questioning the future of ABC and Disney’s linear channels inside the company, and continuing to explore plans to take ESPN over the top. He is also facing another potential battle with billionaire activist investor and Disney shareholder Nelson Peltz, who goaded Disney all spring with threats to insert himself on the board. He backed off before the annual meeting, when directors are elected, after Iger laid out a series of strategic changes. But Disney stock has slumped amid streaming losses, linear TV declines and other operating challenges. So Peltz is back and will apparently be making another run at the board when proxy season starts.
Disney, for its part, has touted its strong cash flow of $1.6 billion and $11.5 billion of cash on its balance sheet as of the last fiscal quarter, with interim CFO Kevn Lansberry saying on that earnings call that “we will have plenty of future cash flow to help fund all of this going forward.”
It is also is in the midst of offloading its Indian operations to Reliance Industries for around $10 billion.
Disney stock ticked up in after-hours trading after the Hulu deal was announced today; it is hovering around $81 a share.
Comcast share popped higher as well. The company has one of the strongest cash positions in the industry already and is set to see a multi-billion dollar inflow. Roberts, on his last earnings call, clearly expects the Hulu payout to be well over the minimum agreed upon in 2016 and sought to explain that to Wall Streeters. He called Hulu “the #2 AVOD, SVOD service behind Netflix. The #1 company has a $200 billion valuation in the market today. In terms of the engagement of customers, I think Netflix and Hulu are in a class by themselves. Based on Nielsen, there’s 2 to 3x the engagement for Hulu than any other streaming service, save for Netflix,” according to a transcript of his comments.
As the two sides now enter the appraisal process, Roberts called it an unusual once since the appraiser must value the stake as if Hulu were to be sold “as is…as a business…through some hypothetical auction or sale process to get that maximization. That could be a sealed bid. It includes Comcast as a bidder. Hypothetically, Disney is a bidder or any other company, tech company and the like as a bidder. What you’re actually appraising therefore, and this is really the point, is more than Hulu, a lot more than Hulu, in my opinion, because you start with Hulu as a standalone. Very successful. The numbers are mostly private, so we’ll leave that up to the appraisal process. Second, no one’s ever sold a pure play or auctioned off, a pure-play streaming asset that’s in this kind of position. That’s a scarce kingmaker asset, whoever would get that.”
With Hulu “you get all the content and you get all the bundling, and you have your own synergy as a buyer. So, let’s unpack that. The content comes from many sources for Hulu. A lot of those are made by Disney-owned entities. And so, in this hypothetical sale, which they probably would never actually sell it with all of the content, not just for a year but just as is. So, there’s no end date that we think that changes that. The value of the bundle, we’ve seen Hulu packaged with Disney and with ESPN+, you’d be able to stay in that bundle.” Bundling reduces churn. “So that value goes with it. And we’ve seen analyst reports that a buyer, depending on whom they were, if it was to scale them up, they could have a couple of billion dollars, or who knows what, of synergy. Just that piece of the synergy and the churn benefit could be worth $30 billion. And that’s before you ascribe any value to the actual Hulu. And of course, when you go into one of these really robust auctions, and I think if you were selling all of this as is there’d be a line of bidders around the block to actually buy all the content, all the bundling of Hulu.”
“So, I think we are excited to get this resolved. And the minimum number of [$27.5 billion] that people have bandied about, that was just a hypothetical that we picked five years ago, because Disney had control of the company. The company is way more valuable today than it was then.”
“They have an appraiser, we have an appraiser.” If they’re far apart, “then you get a third appraiser. And so, it will take a little time for this to play out. But both companies wanted to get it behind us” – which is why the process was moved up.
An SEC filing clarified process a bit after the call. It noted that if the the companies can’t agree on a fair market value, “then such determination shall be made by two investment banking firms of national standing,” one repping Disney, the other Comcast. “Each investment banking firm shall be required to determine the Fair Market Value within thirty (30) days after being notified of its selection.”
“If the two determinations by the two investment banking firms are within ten percent (10%) of each other, the Fair Market Value shall be the average of the two determinations. If the two determinations are not within ten percent (10%) of each other, then the two investment banking firms shall select a third investment banking firm of national standing to make a third determination within thirty (30) days after being notified of its selection, in which case the Fair Market Value shall be the average of the two determinations that are closest in value to each other.”
Analysts have been bugging Comcast for months what it plans to do with the cash. On the call, at least, Roberts said the “plan is to return it to shareholders.”
Dade Hayes and Jill Goldsmith contributed to this report.
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