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Disney Activist Loeb Urges Using Dividend to Fund Streaming

Scott Deveau
·4 mins read

(Bloomberg) -- Activist investor Dan Loeb is urging Walt Disney Co. to permanently suspend its dividend and redirect those funds to its streaming service, saying the entertainment giant needs to lean in to a massive industry shift.

Loeb sent a letter to Disney Chief Executive Officer Bob Chapek Wednesday saying he believes $3 billion in annual dividends would be better spent on its direct-to-consumer streaming service, Disney+. He said doing so could more than double Disney+’s budget for original content, bring in additional subscribers, lower churn and boost pricing power.

Disney’s shares rose as much as 2% Wednesday after Bloomberg reported on the letter. The company, which has a market value of $222 billion, had seen its stock decline 16% this year through Tuesday’s close.

Disney has been the dominant studio at movie-theater box offices in recent years. But with brick-and-mortar cinemas suffering during the pandemic, the company needs to focus on streaming with new urgency, Loeb said. He cited the decision by Regal to temporarily close its U.S. theaters as a sign that cinemas are going away.

“While we all share a certain sadness and nostalgia for this eventuality, I am sure that people felt similar emotions about horse-drawn carriages when the automobile was first introduced,” Loeb said in the letter, a copy of which was obtained by Bloomberg.

“Every Hollywood executive has been able to enjoy first-run films in the comfort of their home theaters for years,” he said. “We urge you to democratize this experience.”

Loeb’s Third Point owns less than 1% in Disney, according to data compiled by Bloomberg. A representative for Disney didn’t immediately respond to a request for comment.

Disney said last week it was laying off 28,000 workers, wiping out about quarter of its U.S. theme-park workforce. The company hasn’t reopened its parks in California yet, hampered by state restrictions.

Like other studios, it has also been forced to delay the release of movies in theaters. But Disney+, launched in November of last year, has been a runway hit. It’s attracted more than 60 million subscribers and even won praise from the likes of Netflix Inc. CEO Reed Hastings. Its success has helped bolster Disney shares, with its other businesses faltering.

Dividend Plans

Disney’s dividend plans were already in flux. The company didn’t pay its $1.6 billion dividend in July, and Chief Financial Officer Christine McCarthy was noncommittal about future intentions when asked about the issue last month. She said her priorities include boosting the company’s credit rating and reinvesting in its businesses.

Loeb said he looked forward to hearing more about Disney’s “accelerated push” for its direct-to-consumer, or DTC, operations at the upcoming investor day. The Burbank, California-based company has already made “admirable progress” on that front, he said.

“We share the view that Disney is embarking on one of the most important transitions in its history: shifting distribution of the world’s most iconic entertainment brands from the box office to the home,” he said. “Disney+ has made admirable early progress.”

He argued, though, that investing more aggressively in content production and acquisitions would return multiples of the current dividend yield. He also cited the impact the streaming of “Hamilton” had on the service earlier this year, helping to attract an incremental 2 million subscribers and hundreds of millions of dollars in extra revenue. It only cost Disney $75 million to acquire the rights to the film, Loeb noted.

‘Fully Confident’

“We are fully confident that scaling that $75 million to several incremental billions and focusing that spend on Disney’s iconic in-house brands like Marvel, Star Wars, Pixar and Disney Animation, as well as selected acquisitions, would drive even greater subscriber growth for Disney+,” he said.

Loeb said the company should merge its Disney+, ESPN+, Hulu services -- along with a new international product called Star -- into a single platform. He also said the company should raise the price of Disney+ and no longer release movies such as “Mulan” on a pay-per-view basis, including them instead in a customer’s standard subscription.

“We understand that a more aggressive investment strategy may pressure short-term earnings on the path to creating long-term value,” he said, citing Warren Buffett’s famous quote that “companies get the shareholders they deserve.”

“Disney deserves growth-minded, long-term oriented investors, and we believe that a strategy centered around using Disney’s many resources to drive growth in the DTC business will further attract them,” he said.

(Updates with share price in third paragraph.)

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