This morning, I picked up my wife and daughter at Miami International Airport. We’ll make the drive back to Southwestern Florida this afternoon. We have driven all across Florida in the last month. The longest drive, of course, being our recent trip to Walt Disney World for my daughter’s birthday.
It had been a while since the word “Disney” crept out of my mouth – the last being when I saw the final bill for our family vacation. There might have been a “verb” thrown in front of the word “Disney” when I saw that tab.
But now, Disney is back in the headlines. One of the world’s top activist hedge fund investors has scooped up a stake in the entertainment giant. Trian Partners’ Nelson Peltz, unleashing his inner child at 80 years old, is pushing for a board seat at the company.
What does Peltz want? And will he succeed?
Let’s dig into the House of Mouse.
The Activist Invests
Activist investors are financial managers that attempt to effect change at companies by taking a stake and pushing for management or strategy pivots. Typically they’ll fight for a board seat, nominate someone friendly to their firm (or themselves), and take direct aim.
Sometimes they’ll push for the company to sell assets (or even the entire company).
Sometimes they’ll try to force out a CEO, strategic partner, or someone else with power. Or sometimes, they just want the company to make more profits and enhance shareholder value.
Activism can take many different forms. Some of the most notable hedge funds and managers to take the activist approach include Bill Ackman and Pershing Square Capital, Carl Icahn and Icahn Partners, Jana Partners, Starboard Value, and Nelson Peltz.
Peltz, who’s taken about a $940 million stake in Disney, is a legend in the business. He’s already the non-executive chairman of the Wendy’s Company (WEN), Sysco (SYY), and the Madison Square Garden Company (MSG). He’s fought infamous battles against Kraft Foods, Proctor & Gamble, Family Dollar, and State Street, and famously turned around Snapple.
So what does he want with Disney?
Bob Iger and the Battle Forward
Walt Disney stock is off more than 35% in the last 12 months. The company just canned its CEO and replaced him with long-time executive Bob Iger, who came out of retirement.
Markets have been very negative on Disney due to political fighting in Florida and the ongoing questions about the company’s culture moving forward. It’s also engaged in a massive streaming battle with competition, struggling to determine what to do with its ESPN properties, and facing challenges around profitability.
Peltz’s presentation on Disney called “Restore the Magic” highlights the company’s underperformance over the last few years against its peers. He argues that the company overpaid for 21st Century Fox in 2019, criticizes Disney’s direct-to-consumer strategy, and raises hell about the company’s weak succession plan.
The two first challenges are largely moot. It’s not like the peers of Disney enjoyed significant success over the last year. Investors rushed into streaming services like Netflix and others in recent years.
Direct-to-consumer has been the driving business for all of these companies. In addition, it’s hard to argue that Disney has a bad acquisition strategy.
The company’s LucasFilm and Pixar purchases are still paying massive dividends. And its deal for Marvel has given it box office dominance in recent years. The Fox deal also gave the company the lead in the sports entertainment world.
But the final issue is Peltz’s best argument for a board seat (even if it finds itself on page 27 of a 35-page pitch).
Bringing back Bob Iger is a real challenge for this company. Although he’s well-known and well respected by Wall Street and internally by employees, Disney lacks a real post-Iger plan. The company extended his retirement date FIVE TIMES between 2011 and 2017.
And now… here he is once again.
It’s unclear what Trian would do to help improve the company’s bottom line. My argument remains that the company needs to boost the most revenue it can from its best-paying customers, maximize its Star Wars franchise, and spinoff ESPN and its Hulu stake.
But finding an executive who can take Disney deeper into this century might be enough to warrant a board seat. Disney, of course, knows that pushing this issue is a threat to Iger just weeks after his return. This could become a rather messy proxy fight.
I’d buy the stock if Peltz scores a seat. Until then, I’ll be waiting on the sideline for a little while longer – and then deciding on the best entry level at which I’d sell a put spread.
To your wealth,
P.S. Please let me know if you have any feedback, questions about today’s issue or anything else. Just email us at email@example.com.
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Market Momentum is Green
Our latest addition to Tactical Wealth Investor continues to rally, and the rest of the market now faces the test of earnings season and any revisions to outlooks and expectations. Looking forward, investors will continue to play the wave of earnings season.