Justin Solomon | CNBC
Daniel Loeb’s Third Point has taken a new stake in Disney, forcing the entertainment giant to spin off its sports network ESPN, according to a letter obtained by CNBC’s David Faber.
Shares rose as much as 2% on the news.
In a letter to Disney CEO Bob Chapek, Loeb said there are strong arguments to divest the ESPN business as the segment generates significant free cash flow for Disney.
“ESPN would have more flexibility to pursue business initiatives that might be more difficult as part of Disney, such as sports betting,” Loeb said. “We believe that most of the arrangements between the two companies can be contractually replicated, as eBay has used PayPal and will continue to use the product to process payments.”
Disney makes more money from cable subscribers than any other company thanks to ESPN alone. ESPN and sister network ESPN2 together charge nearly $10 a month, while Disney requires pay-TV providers to include ESPN as part of their most popular cable packages.
ESPN+, a limited-content streaming service, has become a stronger product over the past year as Disney moves more exclusive live games to the service. Disney said last month it will increase the price of ESPN+ to $9.99 per month from $6.99 per month starting August 23, its biggest price hike to date.
Second, Loeb urged the entertainment company to integrate streamer Hulu directly into the Disney+ direct-to-consumer platform.
Comcast has entered into an agreement to sell its 33% stake in Hulu to Disney within two years. Loeb said Disney must “do whatever it takes” to acquire Comcast’s remaining minority stake before the 2024 deadline.
“We believe it would even make sense for Disney to pay a modest premium to accelerate integration,” Loeb said in the letter. “We know this is a priority for you and hope a deal is closed before Comcast is contractually obligated to do this in about 18 months.”
Disney just had a strong quarter, with streaming subscriber growth surpassing estimates. Disney also delivered better-than-expected results on both the top and bottom lines, supported by higher spending in domestic theme parks.
Loeb has a history as an activist investor in the media giant. Most recently, he held a two-year stake, from 2020 to early 2022, forcing Disney to ramp up its streaming services.
Shares of Disney are down about 20% this year.
Disclosure: CNBC is part of Comcast’s NBCUniversal.