According to reports, Walt Disney Co (DIS) has been in preliminary talks with Nexstar Media Group, Inc (NXST) about potentially selling the ABC Network for a value of $4.0 billion or more.
Disney has stated that it is exploring strategic options and has not yet made a final decision.
Additionally, there are indications that Disney will reduce its target for Disney+ streaming subscribers, which was previously estimated to be between 215 million and 245 million by the third quarter of 2022.
Analyst Brandon Nispel from KeyBanc believes that a potential sale of ABC would be unfavorable for Disney, while the cut in subscriber targets is considered neutral.
Nispel also notes that a potential deal for ABC at $4.0 billion would likely result in significant dilution for Disney.
A sale of ABC would indicate that Disney has a pessimistic view of the future of Pay TV, which could result in decreased valuations for linear cash flows.
FCC regulations limit TV station ownership to 39%, which may pose challenges if Nexstar is already at this limit.
In Disney’s last report, the operating income for the Broadcast segment was approximately $2.0 billion for FY20.
Nispel expects that while advertising revenue may have been under pressure, growth in retransmission consent and reverse compensation will result in ABC’s operating income being around $2.0 billion, in line with Disney’s previous report.
Nispel estimates the value of ABC to be around $6 billion.
Regarding the reduction in the Disney+ streaming subscriber target, the company’s last guidance during the third quarter of 2022 included 80 million subscribers from Hotstar.
While the number of Hotstar subscribers is expected to decrease significantly, a cut of tens of millions of subscribers to the core Disney+ service would represent a substantial decrease from the previous guidance of 135 million to 165 million subscribers.
This would not surprise investors, as KeyBanc currently estimates Disney+ to have a total of 150.7 million subscribers by FY24, compared to the consensus estimate of 159.1 million.
Price Actions: DIS shares traded higher by 0.65% at $85.03 on the last check Friday.