Disney used unconventional monetary principles to calculate its functionality in a flattering business presentation designed to convince shareholders to vote in its favor at its annual meeting today.
The vote was led by Blackwells Capital and Trian Fund Management, two hedge funds that have amassed giant stakes in Disney and are seeking board seats. Blackwells asked for three, while Trian needs two: one for co-founder Nelson Peltz and one for Jay Rasulo. who served as Disney’s chief financial officer from 2010 to 2015. It’s a very private and bitter battle.
Broadly speaking, both budgets claim that Disney has failed to live up to its shareholders’ expectations in recent years, and as evidenced by this, its stock value has fallen roughly 40% from its peak of $201. 91 in March 2021. There are reasons for this.
The global cost-of-living crisis has cast a grim spell on all of Disney’s key divisions since the coronavirus pandemic was withdrawn. Many other people can no longer stop at Disney theme parks or go to the theater, while others have had to cancel their subscriptions to Disney’s streaming platform and the sports network ESPN, a procedure known as “cordon-cutting. “
Compounding the problem, the economic downturn has coincided with heavy investments through Disney in streaming content in an attempt to lure subscribers away from its main rival Netflix. The streaming unit has suffered losses of more than $11. 3 billion since its launch in 2019, with expected profitability through the end of this year.
As I’ve written before, in recent years, Disney has also bet heavily on big-screen videos that were anything but dream tickets. In fact, in recent days, it became known that Disney lost $130 million from last year’s Indiana theatrical performance. Jones and the Dial of Destiny alone.
The film was greenlit in 2016 by Disney CEO Bob Iger, who also presided over the rising costs of theme park and hotel tickets. Similarly, cord cutting was also a fear under his leadership and in 2019 he introduced Disney before resigning the following year.
Iger passed the reins to Bob Chapek, then head of Disney’s Parks Division, whom he blamed when Disney’s stock value plummeted in 2022. The company lost 31. 5% of its cost in the first 11 months of the year and in a bid to recapture The Magic, Disney tried to take over the media giant’s more sensible work.
Bob Iger is back at the helm of Disney, he hasn’t replicated his past successes (Photo via Array. [ ] Charley Gallay/Getty Images for Disney)
Since then, Iger has reduced prices and valuable content through $7. 5 billion in production. Disney is also planning an ESPN streaming service, introduced an ad-supported discounted Disney package and introduced it for free at the water park to hotel guests at its sprawling Walt Disney World theme park complex in Orlando, Florida.
Blackwells does not believe that this will be enough to give Disney a satisfactory end and advised splitting it into 3 separate public corporations that would have their own specialized control team. Disney resisted this proposal, arguing that it would mean the end of its synergy and the conglomerate founded. through Walt Disney in 1923.
Surprisingly, Trian’s application for board seats is even more debatable than that. In February 2015, Rasulo got rid of Disney’s No. 2 spot and left the mouse 3 months later, after a total of 29 years with the company. He’s not the only former Disney employee worried about Trian.
Another component of Peltz is Israeli-American billionaire Ike Perlmutter, president of Disney’s Marvel Entertainment superhero division. He clashed with Iger and fired him in March last year as part of cost-cutting.
In this context, Disney recently released a presentation titled “The Right Board, the Right Strategy: Disney’s Plan for Shareholder Value Creation. “The 67-page article highlights Disney’s accomplishments in trying to convince shareholders of Iger’s vision for the company and vote for the managers to like. He even goes so far as to claim that between 2020 and 2022, Disney’s control and board of directors skillfully controlled the severe effects of the global pandemic. If this were indeed the case, it begs the question as to why Disney needed the Chapek fireplace.
Peltz and Rasulo are the center of attention in the presentation and, curiously for a company cautious in its formulations, their descriptions are full of unverifiable statements of opinion.
Apparently written with a crystal ball in his hand, the filing states that “Jay Rasulo will hurt Disney” and, suggesting that the authors are also mind-sensitive, adds that “Peltz has nothing to do with managing creativity. “
In fact, the presentation tries so hard to prove that Disney is right that it ends up contradicting itself. He states that “neither Peltz, who does not perceive the media, nor Rasulo, who has not been able to weather the disruptions of the industry, have the capacity to assist Disney. “If this is true and not just an undeniable criticism, then why does the filing later claim that Disney “has already implemented the vast majority of Peltz’s ‘suggestions'”?
Not only does this suggest that Disney is holding on to a straw, but also that its argument is circular. By so strongly opposing Trian’s administrators, Disney gives the impression of being closed-minded, which is exactly what Trian and Blackwells complain about. They say Disney is in dire need of something new, and its presentation only serves to make it look like it’s not. To achieve this, great efforts must be made.
Thanks to the history between Iger and Perlmutter, the presentation is as complete a eulogy to Disney’s CEO as it is to the company itself. Such is the acrimony between the two men that CNBC has even warned that Iger could resign if Trian wins its bid for the board.
There is no doubt that with Iger’s departure, his greatest legacy will be four historic acquisitions. They began less than a year after he became Disney’s bigwig when he approved the $7. 4 billion acquisition of computer-animated film maker Pixar, which owns Toy Story. franchise in January 2006.
He continued three years later to pay $4 billion for Marvel Entertainment, the home of the beloved Avengers franchise. This helped Disney attract more young children and gave the company a counterpart to its successful princess franchise. Iger didn’t stop there and in 2012, Disney bought Lucasfilm, which owns the rights to Star Wars and Indiana Jones. That also costs a whopping $4 billion, but it’s nothing compared to what’s to come.
Disney spent $4 billion on Marvel Entertainment ©Marvel Studios 2019
Iger left his biggest deal for last when Disney bought 21st Century Fox for a staggering $71 billion in 2019. Fox has given Disney the film rights to the superhero teams, the X-Men and the Fantastic Four, as well as adult content for its streaming platform, which has yet to pay off.
Iger is almost synonymous with those 4 chords, so perhaps it’s no surprise that they feature prominently in the presentation. It devotes an entire page to the culmination of those efforts under the title: “Sustainable Franchising Showcases Our Powerful Intellectual Property and Unique Monetization Capabilities. “”This, too, is desperate.
The goal of the page is to showcase the monetary advantages that Iger’s iconic transactions have brought to Disney. Franchise logos similar to those deals are displayed alongside a timeline of key advancements, such as the opening of theme park rides in them and the debut of new films in the series. Next to the timeline is a figure showing the supposed return on investment (ROI) they generated.
According to the document, Star Wars generated a 2. 9x return on investment for Disney, while The Avengers generated a 3. 3x return on investment and Toy Story is even higher at 5. 5x due to the lower costs of making animated movies for PC. Also the reason why the list is topped by the popular PC animation franchise Frozen, which is said to have produced a return on investment 9. 9 times greater than Disney’s investment. All of this is explainable at first glance, but with a bit of digging deeper, it’s soon revealed that Disney has used every trick in its spellbook to come to those conclusions.
Thanks to Disney’s unconventional methodology, Frozen generated a 9. 9x return on investment (Photo via Alberto E. . . . [ ] Rodriguez/Getty Images for Disney)
The Smoking Gun is Frozen because it’s not part of any of Iger’s four historical chords. In fact, it’s an adaptation of Hans Christian Andersen’s story, Frozen. This immediately begs the question of how ROI is calculated if there is no investment to obtain it. . Surprisingly, the fine print at the bottom of the page doesn’t answer that question, but it does imply a blockbuster reveal.
The fine print states that the ROI calculation is based on “titles released as a result of Disney’s acquisition of the intellectual property. “This doesn’t solve the conundrum of Frozen because it’s not an established franchise that was acquired through Disney like the other 3. on the page. However, the filing then clarifies how the investment was calculated.
The fine print states that “the investment reflects the production, printing, and advertising prices of the film related to the theatrical release of the titles, and in the case of animated titles, it also includes production overheads. “In short, the “I” in ROI covers the film’s production expenses and marketing prices. There is no indication that the ROI calculation takes into account the charge of Disney’s acquisition of the corporations that own the franchises, and this is not as significant an omission as it sounds.
Despite the early appearances, the page purports to show the return on investment of Disney’s acquisition of Lucasfilm, Pixar, and Marvel, though only the Star Wars, Toy Story, and Avengers franchises that comprise them. Lucasfilm, Pixar, and Marvel own a host of other franchises and assets, so it wouldn’t make sense to assign the total acquisition value of those corporations when calculating the ROI of Star Wars, Toy Story, and Avengers. There’s no doubt that this is what Disney intended to do, as The Fine Print even lists the films in the franchises on which the ROI calculation is based.
Therefore, there is no doubt about the logic when calculating the prices of the 4 franchises on the presentation page. However, the “R” for ROI is another story. The fine print is very transparent about what doesn’t come with the return. And that makes a lot of sense, too.
It states that the return “does not come with derivative revenue streams, such as park attractions, or original DTCs related to such franchises or product proceeds from pre-established franchise customers. “
From the bottom of this list, the franchises’ pre-set customer product benefit refers to the cash flows that were in position prior to Disney’s acquisition of franchises, so it’s a good explanation for why to exclude them. Similarly, DTC, or Direct To Consumer, refers to streaming screens and the explanation for why they deserve to be excluded is also that subscribers pay to access Disney’s entire library of content, not just express screens. As a result, it’s unimaginable to assign subscription fees to express franchises and the same goes for theme park attractions, as visitors have access to all of them for the value of admission.
Very well, but then comes a disturbance of the force.
The fine print adds that the comeback is based on “directly related theatrical releases, adding theatrical releases, home entertainment, TV (pay and free) and customer products,” which, again, makes a lot of sense. It adds, however, that the calculation is based on a 10-year period of “generated and expected” results. In other words, the ROI figure is based in part on a forecast that may not even be accurate. Surprisingly, this is far from the ultimate synthetic facet of the calculation.
The definition of “return on investment,” which is described as “the ratio of profits to investment,” is prominently displayed in the fine print. Except it’s not the return on investment.
As the following definition shows, “return on investment is expressed as a percentage and is calculated by dividing the net profit (or loss) of an investment by its initial charge or expense. “The same goes for Harvard Business School, Pepperdine, and almost every single one of them. every elementary business school and monetary institution.
The clue is in the word “return. ” The profit is not a return to the owner, as a portion of it must be paid as a price, unless there is none, which in fact does not apply in the case of Disney. Calculating the return on investment on earnings ignores prices and therefore artificially inflates the backline.
Take, for example, a movie that grossed $1 billion in tickets. The studio typically gets 50% of the box office, giving it $500 million in revenue. Let’s say the amount the studio invested in the film (after any rebate or incentive to shoot in specific jurisdictions) is $300 million, giving it a profit of $200 million.
When calculating return on investment, a ratio of $500 million to $300 million of investment provides a multiple of 0. 7x. On the other hand, the actual return on investment approach involves dividing the $200 million profit by the $300 million investment, resulting in a loss for the studio.
Let’s take another example: If a film generates $850 million in ticket sales, providing the studio with $425 million in cash, on a $110 million investment, it makes a profit of $315 million. Disney’s definition of the cash-to-investment ratio provides a 2. 9x return on investment, as the film generated $315 million in cash after repaying the owner’s $110 million investment. However, in the actual definition of the profit-to-investment ratio, we get a return on investment multiple of 1. 9 times. , as the film made $205 million in profits once the studio recouped its $110 million investment.
Try as many numbers as you need and the result will be the same: employing the ratio of income source to investment will yield a higher result than the ratio of profit to investment, which is the same old definition of return on investment. The exception is if the prices are zero, which does not apply to Disney videos or customer products.
This applies to any industry. Take, for example, a real estate owner who buys a hotel for $200 million. This charge is rarely taken into account in Disney’s examples, so we forget it here as well. The owner invested $25 million to renovate the hotel and generated $100 million in money over 10 years. Its prices during this period amount to $50 million, leaving a profit of $50 million for the owner.
Using Disney’s definition of the ratio of cash to investment effects in a 3x return on investment. In fact, the hotel has generated $75 million in cash beyond the owner’s $25 million investment. However, the existing definition of ROI – the profit-to-investment ratio – effects at a multiple of 1x since the hotel only generated $25 million in profit once it paid off the owner’s $25 million investment.
Again, go through as many numbers as you need and the result will be the same: Disney’s definition inflates the ROI result unless prices hit zero, which is not the case here. We reached out to Disney to ask why they were employing this definition. of the ROI, we still haven’t gotten a response.
It is understood that Disney did not mislead investors as the method is in the fine print of the filing. However, the use of such a concise definition makes the media giant even more desperate and is such an ordinary resolution that it calls into question the credibility of the entire presentation.
This not only makes Trian shine, but Blackwells as well, and is shown through his call to break up Disney. The media giant’s existing recreational strategy is to have a small number of theme parks spread around the world, so many tourists have to travel long distances. to get there, making the party a special occasion. As a result, they are willing to pay more for it, which increases profit margins.
Disney’s vacuum in the UAE has led to the theme park sector in its key cities of Dubai and Abu Dhabi being ruled by Dreamworks, SeaWorld and Warner Bros. Iger shouldn’t have any challenges with the UAE, as it’s a more progressive country. on almost each and every front than China, which is home to two Disney parks.
SeaWorld opened in the United Arab Emirates in 2023
There is rarely a Disney store in the UAE, as it is home to one of the world’s most giant grocery malls and a host of other U. S. retail chains. U. S. brands include OshKosh B’gosh, Williams Sonoma, Payless ShoeSource, and Bath.
If Disney parks were managed by a real estate company, it could simply adopt the strategy of choosing a wider distribution and reducing ticket prices, which would especially increase distribution and revenue. It would also ensure that Disney rarely falls far behind its major rival NBCUniversal, which is planning smaller parks in Frisco, Texas and the U. K. , as well as smaller attractions in major cities to capitalize on the growing trend of location-based entertainment.
All of this contributes to the conclusion that Disney’s presentation backfires. After all, if Trian and Blackwells are such insignificant opponents, why is it mandatory to make this presentation in the first place?Given some of the claims made in the document, this may end up casting a dark spell on Disney, even if it wins the board’s vote today.