Bob Iger and Brian Roberts lock horns over ‘kingmaker’s asset’ Hulu

In February, Disney chief executive Bob Iger surprised employees and investors by saying that “everything is on the table” regarding the future of Hulu, adding that its content was “undifferentiated”.

Many assumed Iger was ready to jettison the streaming service. But just three months later, Iger said his remarks had been “a little harsh,” insisting he was planning to keep Hulu and integrate it with the Disney+ app.

By early next year, Iger will have discovered how much the decision to hold on to Hulu, home to shows such as Only Murders in the Building and The Bear, is going to cost him. On September 30, Iger’s team will begin a months-long process with Comcast to determine the value of the cable giant’s minority stake in Hulu, setting the stage for Disney to purchase it and gain full ownership.

Disney and Comcast have been in an uneasy relationship over Hulu since 2019, when Iger’s company gained a 66 per cent stake in the streaming service through its acquisition of 21st Century Fox. Comcast holds a 33 per cent stake, and the two companies agreed at the time that either could initiate a sale or purchase of all of Hulu at a minimum valuation of $27.5bn. 

The process of determining the value of Comcast’s stake was expected to begin sometime next year, but the companies recently agreed to start it sooner. Wall Street analysts admit they have no idea how it will play out, but the consensus is that Disney will end up having to pay at least $9bn for the 33 per cent stake — and possibly much more.

Brian Roberts, Comcast’s chief executive, called Hulu a “kingmaker’s asset” at a Goldman Sachs conference this month. He argued that Hulu’s value has increased significantly since 2019, and suggested that a fair price would be around $60bn thanks to potential synergies and a reduction in customer “churn” if it is bundled with Disney+, its flagship streaming service.

“Hulu is a great business,” Roberts said. “I think if we’re selling all of this as-is there would be a line of bidders around the block.”  

However, Disney will want the Hulu value to be set as close to the $27.5bn “floor value” as possible, analysts say. “Any payment above this level may put pressure on Disney’s equity,” Citi analyst Jason Bazinet wrote in a recent research report. “Hulu’s valuation is apt to make someone disappointed: either Disney will pay more than investors want, or Comcast will receive less than investors expect.”

Reaching an answer to this dilemma is expected to take at least until the end of this year, following two — and probably three — appraisals of Hulu’s value.

Both companies will appoint an investment bank to act as an appraiser. If the two sides arrive at a price within 10 per cent of each other, Hulu’s value will be set at the average of the two figures. Analysts see this as an unlikely outcome, given the difference expected between the values assigned by the two companies’ bankers. 

If they fail to settle on a price through the first process, then a third bank will be hired to come up with a value for Hulu. In that case, the final value would be the average of the two closest of the three estimates.   

“There is a wide range of valuation outcomes given the unique nature of Hulu as a business and the role of what will likely be three arbitrator valuations to deliver the final value,” Morgan Stanley analyst Benjamin Swinburne wrote in a research report.  

Jonathan Chaplin, an analyst at New Street Research, said in a report that “both parties have an incentive to deliver a reasonable valuation [since] the outlier among the three valuations will be discarded”.

Chaplin said “we don’t know where this will land,” but added that he expected the number to be higher than the $27.5bn floor value because that would “assume no change in value and no synergies for Disney”.

The stakes are high for Disney, which would need to raise money to buy out Comcast’s stake through a debt offering if the valuation goes above $29.5bn, according to Citi estimates. With Disney’s shares trading near a five-year low, it is unlikely to pay by issuing stock. At the end of the most recent quarter, Disney had $11.5bn in cash on its balance sheet.

Investors have already shown some concern about Disney’s cash flow, analysts said. Last week, Disney said it would double its spending on its theme parks to $60bn over the next decade. The shares dropped after the announcement due to investor concerns about potential pressure on Disney’s free cash flow until those investments start to pay off. Iger has also pledged to start paying a small dividend by the end of this year.

Comcast has said it will use any proceeds to buy back its shares. 

Iger and Roberts, both long-serving media chiefs, have competed against each other for decades.  

Roberts made a failed hostile bid to buy Disney in 2004, when Iger was president and chief operating officer. In 2018, Roberts offered Rupert Murdoch a higher price for 21st Century Fox than Iger had already made, forcing the Disney chief to raise his bid significantly. The bidding war pushed the final price paid by Disney to $71bn, a sum that has been criticised by some shareholders as too high.  

The Hulu negotiation comes as Iger is seeking to cut costs and exit declining businesses. Disney’s streaming business is expected to lose money until 2024, and Iger has floated the idea of selling Disney’s traditional TV assets such as the ABC network. He has also acknowledged that some of Disney’s movie studios need to regain their creative spark. 

Disney and Comcast declined to comment. 

Disney does not break out Hulu’s profitability, but in its most recent quarter the streaming service’s operating income and revenues grew thanks to higher prices and an increase in its number of subscribers. 

Hulu had 48.3mn subscribers in the third quarter — up from about 30mn in 2019 — with average monthly revenue for each subscriber rising to $12.39 from $11.73 thanks to price hikes. Hulu’s average daily engagement is second only to Netflix, according to Morgan Stanley and Nielsen. 

Roberts argues that Hulu has appreciated in value since 2019, despite the turn in investor sentiment against streaming.

“The company is way more valuable today than it was then,” Roberts said at the Goldman conference. “We are excited to get this resolved.”