S&P Affirms Disney A- Credit Rating, Positive Outlook Despite “Strategic Uncertainties” After Bob Iger Interview
S&P today affirmed its A- investment grade credit rating for Disney after CEO Bob Iger, in a recent interview with CNBC, injected a big dose of uncertainty into what the company may look like going forward.
Iger said he and the board are considering a number of strategic options for ESPN and linear television, “Some of these options could change Disney’s business mix over the longer term.” the the giant ratings agency said in a note Tuesday. Iger recently brought on former top Disney executives Tom Staggs and Kevin Mayer to consult on options for ESPN. The two are co-CEOs of Candle Media.
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S&P also affirmed its “positive” outlook, anticipating the media giant will continue to reduce leverage this year and next. “The outlook is positive, reflecting our expectations that leverage could decline…depending on how the Hulu put-call is resolved and how its direct-to-consumer (DTC) segment performs.” (Leverage is a ratio of debt to equity.)
Iger, in the interview, discussed secular pressure on the media and entertainment industry, its impact on Disney, and potential strategic moves as reviews its portfolio of broadcast and cable TV networks, excluding flagship sports net ESPN. “It may reach the conclusion that those networks are no longer core. As a result, Disney is looking at potential options including selling noncore networks,” said S&P.
Alternate paths for ESPN include operating it on a standalone basis and bringing in additional strategic partners. Hearst Corp. owns 20%. Private equity firms, already invested in stations, could see an opportunity in linear TV.
On the content side, he thinks overproduction has diluted focus and led to misses at Star Wars and Marvel. Disney+ may see price hikes and shift in markets. It could consider licensing Disney content to rival streamers.
“In our view, some of these spending and investments considerations will likely improve the company’s profitability and cash flow and could accelerate its deleveraging path,” S&P said, noting the decline of the U.S. linear TV business as viewership falls outside of sports and news and advertisers shift dollars amid cord cutting.
“We view favorably Disney’s attempt to address that business proactively as the price of doing nothing could become a drag on our ratings over time. Still, when we have greater clarity on these considerations, we will assess the impact on Disney’s credit quality.”
The agency expects lower leverage will be driven by higher cash flow as DTC losses shrink, parks improve and the company realizes its anticipated $5.5 billion in cost savings from cost cutting — including about 7,000 layoffs since Iger returned to take the helm of Disney last fall.
The company would ideally like a ‘A’ rating, S&P noted, but any return to that would depend on the resolution of the Hulu put-call – “how much that ends up costing Disney, how it finances the purchase, and an evaluation of the company’s transition to profitable streaming.”
Iger, who recently extended his contract through 2026, made lots of news on the interview. That included infuriating the creative community by calling strikes by the WGA and SAG-AFTRA disruptive and the guild demands unreasonable.
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