Walt Disney: A Battle with Activist Investors

Walt Disney, the iconic entertainment conglomerate behind the beloved Marvel Cinematic Universe, finds itself embroiled in a contentious battle with multiple activist investors. Despite this conflict, shareholders can rest assured that they are likely to come out ahead, no matter who emerges as the victor.

Currently, there are four activists who have set their sights on the House of Mouse. This comes as no surprise, considering that Disney stock has experienced a significant decline, losing more than half of its value since reaching a record high in March 2021. However, amidst the discord, a recent development has emerged. Disney has entered into an information-sharing agreement with one of the activists, ValueAct Capital. This activist has also pledged support for Disney's board slate. On the other hand, rival investment firm Blackwells Capital, while appearing sympathetic to management, is pushing for the appointment of three of its own directors.

Among these activists, Trian Fund Management is the most adversarial. It is seeking to secure two board seats and has strongly criticized Disney for its "continued poor performance." Ancora Holdings stands alongside Trian as another ally.

The drama surrounding Disney's current situation might seem excessive, even for a company of its stature. Yet, it is likely that there will be more turbulence in the coming months. Proxy fights, especially those involving multiple actors, can be costly and distracting for management. However, in this case, such confrontations may be precisely what Disney needs.

Disney has already responded to the pressure exerted by activists. In early 2020, when Trian first launched its attack, Disney announced a $5.5 billion cost-cutting plan. This move temporarily assuaged fears and kept Trian at bay. Nevertheless, as Disney's performance continued to falter, the company was compelled to announce an additional $2 billion in cost cuts in November of the same year, alongside an intention to reinstate its dividend. Trian remained unsatisfied, but the announcement still caused a 6.9% surge in Disney stock.

Change is inevitable for Disney, regardless of the path it chooses to follow. Whether it involves refreshing the board, enhancing succession planning, or linking executive pay to financial performance, as demanded by Trian, these alterations should be seen as positive developments. Therefore, shareholders can find solace in the knowledge that Disney is actively addressing the challenges it faces during this tumultuous time - even as the beloved character Mickey Mouse falls into the public domain.

The Journey Back to the Magic Kingdom

"There's a balance between distraction and incremental pressure that can be felt by management," says Guggenheim Partners analyst Michael Morris, emphasizing the potential benefits of having a constructive activist partner. Morris has set a $115 price target on Disney stock, representing a 27% increase from Thursday's closing price.

Disney's path to success lies in improving the performance of its content slate. Like many other media companies, Disney initially focused on growth at all costs in its streaming endeavors, resulting in oversaturation for its customers. However, the recent writers' strike may have leveled the playing field, compelling providers to be more disciplined with their spending during production ramp-ups. Additionally, Disney possesses an enviable catalog of movies, particularly those cherished by parents, which gives it a distinct advantage.

Morris believes that Disney's intellectual property and franchises provide it with unique influence and power. Personally, I resonate with this sentiment. On a rainy weekend, I ended up spending $17.99 to watch the Disney classic Bedknobs and Broomsticks on Amazon Prime. With better foresight, I could have opted to pay just $13.99 for a month of Disney+ and enjoyed films like Escape to Witch Mountain and other beloved '70s and '80s classics.

In terms of value, Disney stock appears to be compelling. Currently trading at 19.8 times forward earnings, it is on par with the S&P 500 index and significantly below its five-year average of 29.4 times. Though returning to that level may be wishful thinking, the average analyst surveyed by FactSet predicts a 12.5% climb in the shares, reaching $103.08, a conservative estimate that demonstrates the potential for growth.

While it is still early in proxy season, making it challenging to determine who will ultimately shape the future of Disney, one thing is certain—it is a journey back to the Magic Kingdom.