In his highly publicized CNBC interview from Sun Valley on July 13, Walt Disney Co. CEO Bob Iger stressed that gaining full ownership Hulu, by purchasing the minority share owned by Comcast, is now central to the media giant's comeback strategy. That position represents something of a shift from the lukewarm sentiments that Iger expressed about the mainly ad-driven streaming platform in the months following his return to the helm in November of last year. At the time, Iger suggested that Disney wanted to focus on its traditional, branded family fare and action-hero content, and move away from the kind of general entertainment epitomized by Hulu. Analysts speculated, often favorably, that Disney might sell its Hulu stake to raise sorely-needed cash for the likes of lowering debt or funding ESPN's full move from cable to over-the-top subscription.
In May, Iger virtually guaranteed that a Comcast deal would happen by announcing that Disney+ and Hulu were melding their apps. But in this latest conversation with David Faber, Iger emphasized as never before the crucial importance of bundling Hulu into its offerings, and hence the urgency in clinching an agreement with the on-and-off antagonist run by Brian Roberts. "[We] ultimately concluded that we would be better off having Hulu than not having Hulu," Iger told Faber. "In terms of the path to profitability, combining Hulu and Disney+ is a major step in that direction."
The importance that Iger accords Hulu as a linchpin in its revival playbook puts Comcast in a strong position to squeeze Disney. More than any other rivals in the brutal streaming wars, the two giants maneuver constantly to outfox one another. After Disney struck an agreement to buy Fox in 2018, Comcast launched a competing bid that failed, but forced its combatant to many billions more than an original price that already way overvalued the studio's assets. Disney introduced Disney+ at bargain prices designed to grab business from fledging such as Comcast's Peacock. And the Comcast alleged that Disney's stewardship of Hulu stymies the platform's vast promise. "There are a lot of social issues between the two companies," Tom Rogers, former CEO of TIVO and first president of NBC Cable told Fortune. Comcast holds the whip hand, and is giving every sign that it will swing away. Adds Rogers, "When you can put pressure on a competitor, why not do it?"
The buyout arrangement gives Comcast several levers for pressing Disney on time, money, or maybe both. Today, Disney owns 67% of Hulu, and Comcast holds the remaining 33%. Disney gained its commanding position via the Fox purchase, which added 30% to its original stake, while Comcast became a minority shareholder when it bought NBCUniversal in 2011. On May 14, 2019, the two owners unveiled a "put/call" agreement to resolve Hulu's "future ownership and governance." Under the pact, Disney is granted full operating control over Hulu until the end of this year. Starting in January of 2024, Disney can require that Comcast sell its interest to Disney at "fair market value," and Comcast can force Disney to buy its Hulu shares. The accord gives Hulu a minimum total value of $27.5 billion. So Disney must pay at least one-third of that number, or $9.2 billion, for the Comcast shares.
Months ago, Roberts and other top Comcast execs expressed that Hulu isn't core to their franchises, and that they intend exercise their "put" to Disney. And after hinting at a possible sale earlier this year, Iger now confirms that Disney's a willing buyer. If the two sides don't agree on a negotiated price, it will be determined by binding arbitration. The arbitrator isn't named in the companies' filings, but it's rumored to be Goldman Sachs. The mechanics of the process, or whether a deadline applies, is also a mystery.
Still, other mechanics that can influence what Comcast will receive are spelled out in its annual report. Comcast isn't obliged to cover its pro-rata share of any "cash calls" issued by Disney to cover, for example, needed investments or shortfalls in revenues at Hulu. But if Comcast declines to contribute, its percentage ownership in Hulu gets docked. Though how the formula works is unstated, Comcast's ownership can fall as low as 21% from the current 35%, depending on the capital calls it misses, before it's forced fund Hulu. Though neither side has said so, it's widely reported that Comcast isn't paying.
Put simply, the conditions stipulate that Comcast will receive at least 21% of the minimum payment of $27.5 billion for its interest, or $5.8 billion. Why is that hypothetical number important? That guaranteed value has enabled Comcast to borrow $5.2 billion on its Hulu shares, a loan due for repayment in early 2024. So when Comcast gets the proceeds from Disney, it will pocket not the full amount but as little as less than half after repaying the $5.2 billion.
Comcast and Disney have already clashed over the latter's management of Hulu. Comcast wanted its partner to deploy Hulu as its principal streaming platform on the international stage. Instead, Disney used Disney+ as its flagship abroad, marketed under the Star brand first started in Asia. As the Wall Street Journal reported, Comcast initiated an arbitration proceeding claiming that instead of promoting Hulu as a global growth vehicle as promised, Disney was restricting its expansion and curbing its potential value.
That dispute is a precursor to the first possible strategy for pressing Disney: Demanding a price far above the contractual minimum of $27.5 billion. At an investor conference in late May, Roberts asserted that Hulu should be valued on what the entire company would fetch if offered, possibly at auction, all all-comers. In December, NBCUniversal CEO Jeff Shell stated that "We think it's worth a lot of money because it can be sold on a full-control basis, and Disney [will be] writing us a big check in '24."
During the 2020 and 2021 period when Wall Street was valuing streamers on their ballooning revenues and subs, Comcast reportedly valued its Hulu shares internally at many billions above the $9.2 billion minimum. It's virtually certain that Comcast will demand far more than that number. In that case, both sides will submit their estimates of value to the arbitrator, who will set the final figure. Due to Hulu's current, virtually breakeven profit status, analysts mostly agree it's unlikely that Disney will pay much over $10 billion. For example, Peter Supine of Wolfe Research has an estimate of $9 to $13 billion.
The threat that Disney will need to pay an outrageous number is less menacing than the delay Comcast can cause. "Comcast doesn't have a strong incentive to move quickly," says Rogers. "The combination of the loan and the possible decrease in their percentage share because of the capital calls, plus the tax costs on a big cash boon, means it's not a major issue hanging over their heads." By contrast, he says, Disney needs to sprint. "While the deal is in negotiation or before the arbitrator, Disney can't make the case to investors that the Hulu deal will lead to a transformation in its streaming outlook. The more Iger promotes that story, the more the price he'd have to pay to Comcast goes up. As he suggest how valuable Disney is to him, it becomes evidence in the arbitration."
The thorniest issue: Disney can't fully combine Hulu and Disney+, and possibly ESPN+, until the deal is done. And time is of the essence. At Sun Valley, Iger stated that the decline in CBS, ESPN on cable and the other networks are caused by "disruptive forces that are greater than I thought... we have to come to grips with now." Rogers points out that Disney+ sub growth has stalled, and that Hulu's ad revenue per subscriber has fallen for five straight quarters. "They can do some integration prior to the deal, such as putting up a tile so that you can access Hulu in the Disney+ interface. But that's different from a totally unified tech backbone, and getting all the marketing synergies that come from a single, unified service. They can't do that until they complete the transaction."
It's unclear how long Comcast could delay a deal by arguing over price. "Time is the biggest variable in torturing Disney," concludes Rogers. Iger reigns as perhaps the greatest dealmaker in showbiz history, in assembling Fox, LucasFilm, Pixar and Marvel under one turreted castle. Clinching the shares he doesn't own in Hulu, from a determined foe, and doing it in a hurry, won't be anywhere near his most epic transaction, but could prove the most heroic of all.
This story was originally featured on Fortune.com
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