Written by Brenda Nakalema

Should Disney Spin ESPN Off? Analysts Disagree.

Walt Disney’s (ticker: DIS) stock post-earnings run continued into this week following Dan Loeb’s Third Point letter to CEO Bob …

Walt Disney’s (ticker: DIS) stock post-earnings run continued into this week following Dan Loeb’s Third Point letter to CEO Bob Chapek revealing another large stake and outlining suggestions for the entertainment giant. Although one analyst at Citi Research agrees with most of Loebb’s suggestions, he doesn’t think ESPN should be spun off.

In his letter to Chapek, Loeb explained his opinion that Disney should keep its dividend suspended to put free cash flow towards reinvestment in the business, paying down debt, or repurchasing shares. He also suggested cost-cutting measures, integrating Hulu directly into the Disney+ direct-to-consumer platform and reshuffling the company’s board of directors. He argued for exploring a spinoff of ESPN because it could work out for both firms, and the companies can maintain most of their current arrangements going through contractual agreements.

Jason Bazinet, the Citi analyst with a Buy rating and a $160 price target price on the Disney stock, wasn’t so convinced by this proposed strategy. Disney stock gained 1.3%, landing at $125.88 in Tuesday trading.

“While an EPSN spin might result in some near-term upside in equity, we believe retaining ownership might have several long-term advantages,” said Bazinet.

One of the advantages of this strategy would be keeping ESPN off the table for streaming competitors like Amazon.com (ticker: AMZN) or Apple (ticker: AAPL) to acquire it, which would lower the value of Disney’s direct-to-consumer offerings.

“We see sports as a unique facet of Disney’s DTC offering, particularly relative to incumbent DTC firms, like Netflix (ticker: NFLX); an ESPN spin would eliminate this potential bundling advantage,” Bazinet added. “If Disney chose to work with the new ESPN entity via contractual agreements to bundle, there is always the risk that the new ESPN entity may elect to pursue nonexclusive agreements with a broad array of DTC rivals; that wouldn’t benefit Disney’s shareholders.”

Bazinet also alluded to the fact that sports help broaden Disney’s appeal to its advertisers, who might want to reach different audiences instead of sticking to linear TV brands.

“In short, we think Disney’s primary focus should be to use all the assets and brands at its disposal to come as close as possible to replicating the economics of the linear TV business model,” Bazinet said. “Structural separation of any single brand- including ESPN- would run counter to the broader long-term objective.”

In his conclusion, he said, “On cost-cutting, we have rarely come across any firm that does not have some scope for cost efficiencies. And we believe any cost initiatives would be viewed favourably by investors as long as they do not hinder the company’s longer-term growth prospects.”