Disney begins the process to spin off ESPN, ABC in 2023: Wells Fargo

Wells Fargo predicts big things for Disney’s (DIS) sports network ESPN in 2023.

In a new note published Tuesday, Wells Fargo analyst Steve Cahall outlined the company’s key predictions for the media business in 2023, and made a big call about ESPN’s future under Bob Iger’s leadership at Disney.

“DIS will begin the spin-off process for ESPN & ABC, including the launch of ESPN in streaming à la carte,” Cahall wrote. “Cost rationalization and balance sheet options are crucial to achieve this result. The result is a better DIS avoidance.”

Whether or not Disney should consider spun off the popular sports network has been an ongoing point of debate among investors for years, gaining momentum this year after Third Point’s Dan Loeb sent a letter to the company urging an ESPN spinoff.

Loeb argued that ESPN would have more flexibility to pursue business initiatives, such as sports betting, if it were not part of Disney.

Newly returned Disney chief Bob Iger will likely have to decide ESPN’s fate before the end of his two-year term in 2026, though former CEO Bob Chapek previously disapproved of the idea of ​​selling the sports network.

“If you happen to have a vision of the future that the rest of the world isn’t necessarily aligned with yet, then you keep ESPN. You keep ESPN and you have a full complement of general entertainment, family news, sports that no other entertainment company can touch,” she said. Chapek told Deadline, adding that the company received numerous inquiries from companies looking to purchase.

Analysts have remained divided on what Disney should ultimately do with ESPN.

Jason Bazinet, CEO of Citi, previously told Yahoo Finance Live, “We’re very much against splitting ESPN…that’s the dumbest thing ever.”

Bazinet went on to explain that ESPN has the potential to become a much larger global company, especially if Disney chooses to use the internet for distribution. He also noted that the network generates most of Disney’s cash flow, which will ultimately fund the pivot to direct-to-consumer and help offset mounting streaming losses.

“What Disney is starting with a direct-to-consumer company is a lot like a cable company or a telecom company,” Bazinet said, emphasizing that DTC bridges the gap between the consumer and sports rights. “They shouldn’t twist it.”

ANAHEIM, CA - FEBRUARY 10: Mickey and Minnie pose for a photo with ESPN hosts after a Super Bowl preview show broadcast by Disney California Adventure in Anaheim on Thursday February 10, 2022. Pictured, from left, is co-hosts Dan Orlovsky, Keyshawn Johnson, Laura Rutledge, Marcus Spears, and Mina Kimes.  (Photo by Leonard Ortiz/MediaNews Group/Orange County Register via Getty Images)

Mickey and Minnie pose for a photo with ESPN hosts after a Super Bowl preview show broadcast from Disney California Adventure in Anaheim on Thursday, February 10, 2022. (Photo by Leonard Ortiz/MediaNews Group/Orange County Register via Getty Images)

Still, investors are eager to see some change at the company amid steep streaming losses and a plummeting stock price. On Monday, Disney shares closed at their lowest level since March 2020 after disappointing box office numbers for ‘Avatar: The Way of Water’.

In its most recent fiscal year, Disney’s operating income for its Linear Networks segment — including ESPN — totaled $8.52 billion. Losses for the direct-to-consumer unit, which includes Disney+, Hulu and ESPN+, totaled $4 billion for the year.

‘Everything is on the table’

Tuesday’s predictions come as industry viewers expect more media mergers in 2023.

“It’s a pretty good inflection point,” Jon Christian, EVP of digital media supply chain at Qvest, the largest media and entertainment-focused consulting firm, told Yahoo Finance. “The game has changed. It used to be just subscribers at all costs… but now [investors] need these services to be profitable.”

Bart Spiegel, partner of global entertainment and media deals at PwC added: “We are entering a chapter two of the streaming wars.”

“Only time will tell, but I think everything is on the table to try and improve profitability and make the platforms more creative for their overall business,” Spiegel continued.

“Our 2023 forecasts indicate that the media and cable industries are responding to generally tougher times, both cyclical and structural. Tough times mean tough decisions,” noted Wells Fargo’s Cahall.

Even for the global leader in sports.

Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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