Activist investor calls for ESPN spin-off to aid sports betting push

A New York-based hedge fund has called on the Walt Disney Group to spin-out sports broadcaster ESPN as a separate business entity as a way of providing the business with “greater flexibility” in its pursuit of sports betting.

In a letter to Disney group CEO Bob Chapek, Third Point CEO and chief investment officer Daniel Loeb welcomed the global media giant’s continued growth but outlined a series of measures which could aid the generation of “further value” from the business.

Third Point, which currently looks after funds totalling $14bn, has a significant stake in Disney, estimated to be worth a cool $2bn.

Measures imparted by Loeb in his letter include a program of cost-cutting measures, the preservation of its existing dividend policy, which had been suspended during the Covid-19 pandemic, and the integration of the Hulu streaming business into the wider Disney+ offering.

However, it is Loeb’s comments on ESPN which attracted the most attention from stockholders, with shares jumping by 2% during initial trading on the Nasdaq.

Hailing ESPN as a great business which generates significant cash for Disney, Loeb called on Disney to spin-off the business to shareholders with an “appropriate debt load that will alleviate leverage” at Disney.

“ESPN would have greater flexibility to pursue business initiatives that may be more difficult as part of Disney, such as sports betting,” Loeb wrote, qualifying his justification for the spin-off.

“Customers of ESPN and sports leagues would be better served by a focused management team driving a leadership position in sports distribution.

“We believe that most arrangements between the two companies can be replicated contractually, in the way eBay spun off PayPal while continuing to utilize the product to process payments,” the Third Point CEO added.

Disney’s ambitions in sports betting are well documented, with Chapek telling investors last week that the company was “working hard” to pursue a sportsbook deal, which could come in the form of a partnership with a major US sportsbook operator.

ESPN president Jimmy Pitaro is also a fan of expansion into sports betting, highlighting the addition of a sportsbook partner as a “must have” for the firm in June.

Interestingly, and something which may chime with Loeb’s comments, Pitaro cited research at the time which suggested that being more aggressive in sports betting would be a “somewhat neutral” change for Disney.

“It’s not going to help. It’s not going to hurt,” Pitaro said.

Loeb, for his part, also cited the potential of attracting new shareholders to both Disney and ESPN via a spin-off of the business, as investors look to diversify their portfolios and gain greater returns.

“As a result of this transaction, both companies will attract shareholders seeking the respective qualities of each company, allowing the Disney parent multiple to expand as its earnings growth rate increases and the remaining business is no longer haunted by the specter of cord cutting,” Loeb wrote.

“While I understand you have considered this idea in the past, we urge the company to retain advisors to reassess the desirability of the transaction in the current environment, recognizing that a key determination would be the proforma capitalizations, cashflow and credit profile of both companies,” Loeb concluded.

In addition to calling for wholesale changes and the spin-off of ESPN, Loeb suggested that Disney’s board of directors be refreshed due to “gaps in talent and experience” in areas including technology, advertising, and consumer engagement.

In order to further these aims, Third Point has filed for a Hart-Scott-Rodino approval with the Federal Trade Commission in order to engage with both Disney’s management and its board of directors in this endeavour, in compliance with US anti-trust laws.