Disney Ought to Spin Off the Parks Business

Disney Ought to Spin Off the Parks Business

Disney’s Parks business is preventing the “Content” side from realizing its full valuation potential. Look no further than Netflix as a proxy.

  • Disney’s (tkr: DIS), “Content” business is significant. “Parks” is large enough to stand on its own. A simple run rate calculation on Disney’s December quarter “Content” Operating Income figure of $1.9 billion implies approximately $7.5 billion of Operating Income for calendar 2020.
  • Netflix (tkr: NFLX), generated Operating Income of $2.6 billion in calendar 2019. The company expects $1.0 billion of Operating Income for Q1 ’20. Let’s assume NFLX’s 2020 full year Operating Income will grow to $4.0 billion. This would imply a 2020 Enterprise Value (“EV”) to Operating Income multiple of 38x.
  • Disney’s Content business is undervalued. Applying the same 38x EV/Operating Income multiple to Disney’s $7.5 billion Content Operating Income estimate implies an Enterprise Value of $286 billion for the Content business. At present the entire Walt Disney Corporation carries an Enterprise Value of $189 billion.

Disney ought to create two separately-traded companies: “Parks” and “Content” in order to unlock the full value potential of Disney’s “Content” business. Disney’s Board can look to the example of EBAY and PYPL. Further, IAC and Liberty Media regularly spin off businesses from the parent company as businesses scale to a point where they may survive on their own.

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