June 22, 2024

New Proxy Fight to Split Disney Into 3 Companies


Blackwells has started yet another proxy fight with Disney, aiming for three nominees on the board supporting transformation efforts under the leadership of the current CEO Bob Iger. These activist investors also suggest a split

Blackwells has started yet another proxy fight with Disney, aiming for three nominees on the board supporting transformation efforts under the leadership of the current CEO Bob Iger. These activist investors also suggest a split into three companies, recommend “high alert” towards Trian, and criticize Nelson Peltz’s courtship of Elon Musk. Yeah, it’s a lot.

This comes ahead of the Walt Disney Company’s 2024 Annual Meeting of Shareholders on April 3, 2024, and as all of the various parties prepare for battle, proxy style. For its part, Disney has sent a letter to shareholders pleading its case as to why the current board has the right strategy to drive profitable growth and value creation for shareholders, explaining how they’ve made substantial progress against objectives to make the business more efficient and effective. The company has also launched the website VoteDisney.com, which details how to vote (and not vote) via a fun video by Ludwig von Drake.

Trian Group also has its own website, RestoretheMagic.com, and represents the most viable challenge to Disney thanks to the higher profile of its campaign as well as the number of shares held by Peltz, Trian, and its allies. The fact that Disney has felt the need to fend off the challenge with its own website and leaning on the star power and expertise of Ludwig von Drake suggests the company is taking it seriously.

To be entirely honest, the Blackwells proxy fight likely represents less of a threat. For one thing, Blackwells only owns or controls about $15 million worth of Disney stock, which is probably a lot more than anyone reading this (even our biggest fan, Bob Chapek) but still pretty insignificant in the grand scheme of things. For reference, Trian owns or controls about $3 billion worth of shares, including Peltz and those owned by former Marvel chairman Ike Perlmutter.

The latest development is that Blackwells Capital officially filed its definitive proxy statement with the SEC, which put forth its three nominees to Disney’s Board of Directors: Jessica Schell, a former Warner Bros. and NBCUniversal executive; Tribeca Film Festival co-founder Craig Hatkoff; and TaskRabbit founder Leah Solivan.

More interesting than these three rival slates of nominees for Disney’s board and the SEC filing is the letter Blackwells Capital sent to fellow shareholders soliciting votes.

Unlike Trian, which has taken a more adversarial approach, Blackwells Capital is mostly pro-Disney and Bob Iger. Of course, it is a proxy fight, so Blackwells and Disney are at-odds as to the three aforementioned board nominees. Nevertheless, Blackwells indicates that its three nominees for the board pledge to “continue to support Disney’s transformation efforts under the leadership of the current Board and CEO, Robert A. Iger.”

Blackwells promises “an approach of constructive collaboration,” and indicates that its nominees bring unique skills, expertise and perspectives. They also contend that the future of Disney depends on the following:

  1.  Media and Content
  2. Real Estate and Strategic Asset Review
  3. Disney’s Physical, Spatial Computing, and AI-Driven Experiences

The first of these is Disney’s storied “content engine” that has made it the preeminent media company in the world. This is the least interesting part of the letter, but it is worth noting that Blackwells challenges the current board’s lack of media expertise (only two non-executive directors on a board of twelve have significant media experience), and for this reason, they put forward Jessica Schell, one of America’s preeminent experts in content monetization who has 20 years of experience at Warners, NBC Universal, and Disney.

More interesting is the portion about real estate. In case it’s not immediately obvious, real estate refers primarily to the Parks & Resorts division. Presumably, Blackwells is calling it “real estate” because the dude they’re putting forward as a board candidate has real estate experience, but not theme park experience.

According to Blackwells, Disney has an “almost unimaginable portfolio of real estate around the world. The Company owns tens of thousands of acres of land, more than 30,000 of the world’s most profitable hotel rooms, thousands of vacation club units and more. The value of Disney’s real estate holdings is obscured by the Company’s conglomerate structure. But, Disney’s real estate is also the potential source of long duration capital to address balance sheet and income statement challenges and opportunities.”

Per Blackwells, if Disney separated its owned real estate (Parks & Resorts division), it would represent approximately 44% of Disney’s market cap. I’m not exactly sure of how they arrived at this number, but it’s presented alongside a graph and a few footnotes, which means it’s gotta be legit and unassailable.

Their guy is Craig Hatkoff, who could evaluate and implement “a unique world class hotel and hospitality real estate investment trust” (or an REIT). As far as expertise goes, Mr. Hatkoff has been an independent director of Manhattan’s largest office landlord. Okay, say no more, this is the guy I want running the world’s preeminent Parks & Resorts portfolio. What’s the difference between Rise of the Resistance and a high rise, right?

Per Blackwells: “Mr. Hatkoff’s substantial expertise extends to exploring all strategic possibilities with cold eyes, including the potential separation of Disney into three entities, beginning with a management reorganization and leadership selection for each business and resulting in standalone public companies. Disney may simply be too complex for any one successor to Mr. Iger to manage holistically, and Blackwells believes that it is the responsibility of the Board to oversee these types of analyses in the ordinary course.”

Joking aside, we often express frustration about how Walt Disney World is the cash cow that finances the company’s forays and follies into other endeavors, and is milked when said projects operate at a loss. Disney+ has been a particularly sore subject around here, due to the debt to launch and grow that streaming service (including the Fox acquisition, which would not have happened but for Disney’s aspirations to be the next Netflix) coupled with quarterly losses. If it weren’t for Disney+ and Hulu, we’d probably have construction on that $17 billion worth of Walt Disney World expansion by now.

Nevertheless, and I’m no expert, but it seems incredibly reductive to view Disney’s Parks & Resorts through the same lens as commercial real estate in Manhattan. Sure, I sometimes daydream of a setup where Disney doesn’t operate the parks but can hold them to higher standards than they themselves operate (see OLC), but that’s one of those grass is always greener kinda deals.

In reality, synergy is valuable as is the company’s flywheel. Stated differently, a big part of the value of Disney’s real estate holdings is derived from the 100 year catalog of characters and movies and other intellectual property. There is no Walt Disney World without everyone from Mickey Mouse to Merida, and no one is paying $800 per night to stay at the Grand Floridian if it’s on just another piece of real estate in Central Florida. C’mon now.

Even if you could, somehow, separate the real estate out and put it into an REIT, how does that work? What do licensing and operating agreements look like? What about any number of other variables that distinguish the Parks & Resorts division from regular ole commercial real estate? There’s a reason “Hollywood accounting” is a thing, and I suspect that pales in comparison to “theme park accounting.” Even as an absolute amateur and outsider, this just strikes me as complete nonsense.

The final “opportunity” is in the AR/VR space. On that, Blackwells contends that Disney is uniquely situated given its breadth of media content: “Imagine a Disney World where you could have a lightsaber spar with a Jedi on Tatooine, or team-up with Simba and traverse the African plains!”

Blackwells contends that Disney “must be more focused on this once in a lifetime shift in consumer behaviour and interaction.” They then proceed to explain how their nominee is perfect because, I kid you not, she has “built her career on imagining, and creating.” Dang, if only Disney had a group focused on imagining. They could even call themselves the “Imaginators.” Maybe add Walt’s name to give it more gravitas: Walt Disney Imaginatoring. Nah, it’ll never work.

Again, joking aside, this strikes me as attempting to capitalize on the current “it” thing. There’s a lot of froth around AI/AR/VR, and I wouldn’t be surprised if they end up being big and paradigm-changing. But I absolutely do not want to see Disney chasing these emerging tech trends. For one thing (say it with me), Disney is not a tech company. If these investors really understood Disney, they would know this. For another thing, Disney is still recovering from their big bet on streaming, a gamble that invited all of these proxy fights in the first place. And streaming was much more of a sure thing–a logical extension of Disney’s existing businesses!

Look, I think AR/VR could go either way. I’m not immediately dismissive of it, but I do have healthy skepticism. Regardless of my personal feelings, Disney is absolutely in no position to be a leader on it. Partnering with Apple and Meta is absolutely the correct call (I’m guessing that Apple gave Disney a sweetheart deal to develop for Vision Pro at launch), rather than throwing billions of dollars at this every single quarter in a gamble that may (or may not!) amount to anything at a time when the company does not have billions in free cash to invest in the proven thing, Parks & Resorts.

Finally, in another amusing section, titled “The Trian Distraction,” Blackwells goes after Nelson Peltz and friends: “We urge our fellow shareholders to be on high alert with respect to Trian’s campaign and its two nominees, Nelson Peltz and Jay Rasulo. Mr. Peltz has requested a seat on Disney’s Board no less than 24 times in the last year and half. During that time, Mr. Peltz has not offered a single strategic idea that would benefit shareholders. Mr. Rasulo also lacks the relevant skills and expertise that we firmly believe Disney could use additional support with. Begging for Board seats is not a strategy that will make any money for shareholders.” Brutal.

Elsewhere, Blackwells takes another dig and Peltz and his new pal, Elon Musk: “The Trian nominees, for their part, are uninspiring; Mr. Rasulo is a former Disney employee who plainly lacks relevant expertise. Mr. Peltz has spent the last two years begging Disney for a Board seat, and seems to focus his efforts on soliciting endorsements from Elon Musk- who doesn’t own a single Disney share, and is aggrieved at Disney for withholding advertising dollars from his struggling social media platform. These are not winning strategies for Disney Shareholders.” Ouch.

The only thing I’ll add as to this final point is that I’d expect to see headlines involving Elon Musk and Disney in the news for a bit, as he clearly has an axe to grind. The only part of this that’s theoretically relevant for our purposes is whether Musk can or will take a meaningful stake in Disney. It’s exceedingly unlikely. Although he is currently jockeying with Jeff Bezos for the #2 spot on the Forbes Billionaires List, most of Musk’s net worth is non-liquid.

Musk would have to sell a lot of Tesla shares to make it happen–stock that is currently down 25% year-to-date (meaning it’s an inopportune time). Selling and fixating on a new distraction would not be good for Tesla or his desire for more control over it. I’m not saying acquisition of a meaningful stake in Disney won’t happen, because we’ve been down this road before. He seems like the type to do things out of spite or prove the haters wrong, but it’s still not something worth spilling much digital ink over at this point.

Ultimately, the new proxy challenge by Blackwells is somehow even less appealing to me even though it purports to be less antagonistic and more amenable to Bob Iger’s leadership and vision for the future of the Walt Disney Company. While I do think there’s a beneficial way to spin-off Parks & Resorts so it isn’t constantly funding the losses of other divisions, that’s one of those academic exercises that always ends better in fans’ heads than it probably would in reality. And that’s doubly true when it’s being viewed in real estate terms rather than theme park ones.

Then there’s “Disney’s Physical, Spatial Computing, and AI-Driven Experiences.” This is just a bunch of nonsense. It’s the trendy thing to do as c-suites and investors see the success of the leading AI companies and want a taste of that. But FOMO isn’t a business plan, and Disney isn’t a tech company. The power and potential of AI/AR/VR (three different things lumped together) is very real, but the hype around it feels like a few years ago with NFTs (remember those?). To each their own, but I don’t want Disney going down that rabbit hole; partnering with actual tech leaders is the calculated moved given the company’s current financials and core competencies.

Out of all this, the most intriguing thing to me is Jay Rasulo having a board seat. I don’t necessarily want that to happen, but I’m not necessarily averse to it, either. We already discussed a potential reappraisal of the much-reviled Rasulo, and perhaps that’s the wrong call. I don’t know. I do know that I’d like people more receptive to investment in Parks & Resorts, especially if the company is actually going to spend $60 billion over the next decade to expand and enhance Walt Disney World, Disneyland, Disney Cruise Line, and its international theme parks.

Rasulo was there at the start of the last development boom for Walt Disney World, and saw firsthand how mutually beneficial it was for the company’s growth and guests. Otherwise, I’d agree that there isn’t much there there when it comes to the vision that Peltz has articulated for Disney’s future. But at least it has kept Iger and co. on their toes, I guess, and pushed them to move expeditiously in fixing the problems that ail Disney. That probably would’ve happened anyway, though.

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What do you think of Blackwells proxy fight? Agree or disagree with the idea of splitting Disney into three companies? What about the “Restore the Magic” Campaign or Jay Rasulo as a board candidate? Think either of these fights stand a chance of succeeding? Optimistic that this will push Iger to finally get serious about choosing a successor or focus on improving guest satisfaction in the parks? Thoughts on anything else discussed here? Do you agree or disagree with our assessment? Note that neither Disney nor Peltz brought up politics or culture wars in their presentations; as such, all off-topic comments about either will be deleted.

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