He may have given up the proxy fight, but Nelson Peltz clearly got most of what he wanted out of The Walt Disney Co.
Disney’s direct-to-consumer services — that is, streaming — are trending in the right direction. A new reorganization of L.A. County’s biggest company presumably sets up Disney’s myriad operations to be more successful. To help achieve billions in reduced expenses, thousands of jobs will be eliminated this year. The shareholder dividend is probably coming back.
Peltz, who was staging a proxy fight to improve Disney’s operations and profitability, gave up last week, saying his objections had been heard and acted on by Disney’s board.
“Now it’s about execution and ensuring best in class corporate governance going forward,” Peltz’s investment firm, Trian Partners, said in a statement.
Who won?
Peltz, an 80-year-old billionaire, is publicly feeling vindicated for his weekslong effort to be a thorn in Disney’s side. At the same time, Disney’s final salvo in the fight, via CEO Bob Iger’s quarterly earnings conference call last week, backed up the board’s assertion that they didn’t need Peltz at the table.
As far as who won, “I think it’s a lot of both,” said Sahak Manuelian, managing director and head of equity trading for Wedbush Securities in Los Angeles. “Bob Iger can certainly pound his chest and say, ‘Yeah, I’ve got this.’ On the flip side, Peltz is like, ‘I just made a lot of money, very quickly, and I was right, see? This guy’s going to do a lot of stuff I wanted to.’ I think they both came out looking good, to be honest. It’s a win-win.”
Thanks to a better-than-expected first quarter, Peltz’s 9.4 million shares in Disney — around one-half of 1% of the company — are valued at more than $1 billion, a growth of more than $237 million from when he bought them in November.
According the earnings report release last week, sales increased 8% to $23.5 billion, and the company posted a profit of $1.28 billion, up from $1.1 billion the year prior.
Not bad two months out from Iger’s dramatic return, after the board suddenly forced out his handpicked successor, Bob Chapek, following months of missteps and stumbling.
“I think what probably cemented much of Peltz’s decision is that Bob Iger did come back to run the company,” Manuelian observed.
While running his proxy campaign to attain a seat at Disney’s board, Peltz didn’t mince words.
In a letter to Disney’s board and a presentation made to the company in January, Peltz contended that Disney vastly overpaid for its acquisition of competitor 21st Century Fox, for which it shelled out more than $52 billion in 2019.
And perhaps most obvious of all, Peltz took aim at Disney’s “longstanding issues with CEO succession,” an affliction punctuated by the board’s surprise rehiring of Iger — who himself had repeatedly delayed his own retirement — in November.
“Tensions between activist investors and boards usually arise when there are conflicting perspectives on how a company should be managed,” said Cole Short, an assistant professor of strategy at Pepperdine Graziadio Business School. “Peltz’s proposals
(pointed) to evidence relating to Disney’s historical financial performance as well as how he envisions creating value for company shareholders.”
Those proposals included trimming unnecessary and redundant costs, reorienting Disney’s streaming philosophy and an “orderly deleveraging,” which, if considered alongside his vocal disdain for the 21st Century Fox purchase, at least implied a consideration of selling some assets.
Looking forward
Iger mostly responded in kind.
Right out of the gate, he announced in last week’s conference call that Disney would shave $5.5 billion in expenses for the remainder of the fiscal year. He followed this with the announcement that 7,000 jobs would also be eliminated.
“This is a moment of great opportunity for The Walt Disney Co., as we recommit to our historic 100-year legacy of unrivaled creativity and a future of sustained growth and profitability,” Disney’s board said in a statement.
Disney remains cautiously optimistic about its streaming platforms, which operated at a $1.1 billion loss but improved by around $400 million last quarter. And although Disney+ Hotstar lost 3.8 million subscribers in India, the standard Disney+ service added 1.4 subscribers in the United States and other markets.
Iger acknowledged in the earnings call that Disney was probably “too aggressive” in battling for subscribers with an expensive global marketing campaign.
“I think for a while there, it was, ‘Get as much content, throw some money out there, grow subscribers and it’ll work out in the end,’ and now I think it’s a little more scientific,” said Neil Begley, a senior vice president with Moody’s.
Added clarity
Last week’s announcement included a projection that Disney’s streaming would be profitable by 2024.
“The executive team’s recent announcement brings added clarity amid a dynamic time for Disney,” Short said. “Given how Peltz has ended the proxy fight, reacting positively to Disney’s announced changes, it appears that the firm is enacting changes that speak to the heart of his concern — to point the firm in a direction that may deliver long-term, sustainable value for shareholders.
“Having said this,” he added, “layoffs carry real consequences for employees and their families. Even in the name of strategic effectiveness, layoffs should be a last resort. Near-term pressures, such as recent financial underperformance and activist campaigns, can pressure executive teams to focus on immediate, rather than long-term, returns.”
In the immediate wake of the earnings report, Trian issued a simple statement: “We are pleased that Disney is listening.” The morning after, Peltz himself told CNBC’s Jim Cramer. “Now Disney plans to do everything we wanted them to do.”
Reading between the lines, Manuelian speculated that Peltz “probably recognized that it’s a tough, uphill fight” to go after a company like Disney.
“The stock’s had a tremendous rebound since the beginning of the year and I think investors are feeling better about Bob Iger being back,” he said. “I think Peltz has stepped back to think about his options and consider how much money he’s made since purchasing his stake.
“Iger comes out looking like the hero he was perceived to be,” Manuelian added. “Peltz ain’t doing so bad himself.”
