What Next for Hulu? Wall Street Debates Deal Scenarios for Disney and Comcast

Does Disney need Hulu? Does Comcast want Hulu? Can the two sector giants strike a win-win deal for Hulu? Those are just some of the questions swirling around Wall Street these days. But don’t expect clear answers in Philadelphia, home of Comcast, or Burbank, home to Disney, right now. After all, it’s complicated, and there is no immediate deal deadline pressure … yet.

Disney CEO Bob Iger has signaled that he wants to re-focus the Mouse House on its beloved content brands from Pixar and Marvel to Lucasfilm, including family and kids fare. Asked on CNBC on Feb. 9 what that means for Hulu, he said: “Everything is on the table right now, so I am not going to speculate whether we are a buyer or a seller of it. But I obviously have suggested that I’m concerned about undifferentiated general entertainment, particularly in the competitive landscape that we are operating in, and we are going to look at it very objectively and expansively.”

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MoffettNathanson analyst Michael Nathanson later read between the lines on those comments in a report entitled “Hulu Dancing Redux,” adding: “Disney CEO Bob Iger was notably non-committal about Disney buying. And he was notably evasive about Disney selling. Comcast has been characteristically silent. Let the speculation begin.”

Disney is the majority owner of Hulu, holding a two-thirds stake, while Comcast owns a third. Starting in January 2024, Comcast can use a put option to require Disney to take over its stake, while Disney can tell Comcast to sell it its stake. A transaction would be a multi-billion-dollar affair. As per an agreement between the two companies, Hulu would get a fair-market value assessment from independent experts. However, the guaranteed minimum Hulu valuation of $27.5 billion means that Disney would have to cough up at least around $9 billion.

In the fall, Iger’s predecessor Bob Chapek had said he would love to fully own and integrate Hulu sooner rather than later given it is a key part of Disney’s streaming bundle, signaling he was ready to fork over a big amount. “We’d have to have full ownership of Hulu to integrate it into Disney+. We would love to get to the endpoint earlier, but that obviously takes some level of propensity for the other party to have reasonable terms for us to get there,” Chapek noted. “And if we could get there, I would be more than happy to try to facilitate that.”

Comcast chairman and CEO Brian Roberts then also went public, calling the streamer “a phenomenal business.” He added: “It has wonderful content, and I believe if it was for sale, put up for sale, Comcast would be interested — and so would a lot of other tech and media companies.”

Jeff Shell, CEO of Comcast’s NBCUniversal, in December added fuel to the fire, noting that the likely outcome is Disney writing a “big check.” “We think it’s worth a lot of money because it’s sold on a full-control basis,” he said. “And I think there’s no indication that anything else is going to happen than Disney writing us a big check for the asset in ‘24.”

Macquarie analyst Tim Nollen echoed that sentiment in early January. “Disney by year-end ’23 will likely have to come up with the around $10 billion or more to buy in the one-third stake on which it has a call from Comcast,” he wrote back then about Hulu, which lost NBC next-day content because Comcast decided to instead put on its own Peacock streaming service. “We assume under Iger’s leadership the interest in owning Hulu outright will remain strong.”

Now, however, both companies are playing their cards closer to their chests. Iger received much praise from Wall Street analysts for his restructuring plans (with film, TV and streaming businesses now falling into Disney Entertainment and ESPN forming its own division). If the chief exec is not placing his bets on general entertainment content, the debate about the future of Hulu has been reignited.

“Even in the U.S., Disney’s views on Hulu and its strategic value to Disney sound less certain, in our view,” Morgan Stanley’s Benjamin Swinburne wrote in a report this week.

And Wolfe Research’s Peter Supino highlighted: “Iger’s decision to eliminate direct-to-consumer (DTC) subscriber guidance and isolate ESPN as a reporting segment maximizes the company’s flexibility in negotiating a Hulu transaction, pursuing alternatives for ESPN and allocating programming assets to pay-TV/linear, DTC and third-party distribution.”

Even before its earnings update, LightShed Partners analyst Richard Greenfield and colleagues asked in the title of a report: “Is Hulu Less Valuable to Disney Than Investors Realize?” The week before, he had published a report entitled “Is Disney Preparing to Shop Hulu?” following Disney’s decision to start licensing content to third parties instead of keeping all exclusively to their streaming platforms.

“We sense investors would view a Disney sale of Hulu quite favorably as it would clarify their streaming strategy, reduce leverage and improve DTC profitability,” the LightShed team argued this week. “That said, most investors struggle to see a logical buyer of Hulu beyond Comcast and are unclear how Disney would handle the significant number of Disney+/Hulu bundled subs and the substantial original programming that Disney entities have created for Hulu.”

The streamer ended 2022 with 48 million total subscribers, compared to 161 million subscribers for Disney+. However, average revenue per user for the SVOD-only Hulu was much higher, at $12.46, than that of Disney+, at $5.95.

Greenfield & Co. took stock of Hulu’s current status this way: “16 years after launching service, Hulu … is the no. 3 streaming service in the U.S. behind YouTube and Netflix in terms of aggregate connected TV time spent (note that about two-thirds of Hulu’s SVOD subs are ad-lite and a third ad-free).”

In that context, the analyst team pointed out that none of the key 2022 Hulu programming, from The Handmaid’s Tale and The Bear to Pam & Tommy, was among the most-watched streaming content in 2022 as per Nielsen. “Even when you focus on week-to-week, Hulu titles only appeared in the top 15 four times in the second half of 2022 and none of those were for Hulu originals (Alone from History Channel appeared three times and Criminal Minds from CBS once),” the LightShed team noted. Its conclusion: “It is hard to see why Hulu is a must-have asset regardless of whether or not Disney chooses to continue investing in adult-focused programming for Disney+ or pivot solely to kids/family programming.”

Wolfe Research’s Supino though had in a January report suggested a transaction involving Hulu and ESPN as a “big, do-able deal that clears overhangs at Disney and Comcast” and “creates opportunities and solves problems” for both Hollywood giants. Supino’s scenario: “For Disney, selling ESPN (and ABC separately) and taking 100 percent of Hulu vastly improves the company’s business mix and growth, while modestly reducing gross leverage. For Comcast, combining NBC with ESPN creates a permanent winner in sports with superior scale to thrive in streaming and a tax-free Hulu exit. We think both stocks would trade higher.”

He also estimated that Disney could fetch $12 billion-$14 billion for ESPN, while Comcast’s 33 percent stake in Hulu “is worth $9 billion-$13 billion and that Comcast could easily make up the difference in cash, with which Disney would use to repay debt.”

The hurdle for such a deal is that Iger said on Feb. 8 that ESPN remains “a differentiator” for Disney. “We’re not engaged in any conversations right now or considering a spin-off of ESPN that had been done by the way in my absence. And I’m told the company concluded after exploring it very carefully, that it wasn’t something the company wanted to do,” he highlighted. Should Disney change its mind, Supino has argued that for Comcast ESPN would create “a perpetual winner in sports with enhanced market power, and over the long-run, a much stronger position in streaming.”

The analyst also highlighted that NBC’s Peacock is still lacking a huge paying subscriber base, which surpassed the 20 million mark as of the end of 2022. “To sports leagues, NBC/ESPN’s (excluding theme parks) pro forma $38.5 billion of revenue and $5.9 billion of earnings before interest, taxes, deprecation and amortization, along with its enhanced viability as a DTC/streaming service, would make it a preferred and vital distribution partner,” Supino argued.

Meanwhile, the MoffettNathanson team has outlined an altogether different deal scenario for Hulu and its two conglomerate owners. “We expect Disney to explore a sale of Hulu to Comcast or maybe more realistically look to restructure the current partnership between the companies,” they wrote. “If Comcast is willing to rework the deal, we think it could be an elegant way for both companies to claim victory and end up with a 50/50 joint venture that is unconsolidated from results.”