Opinion/commentary. But pertinent, imo.
Iger, Ego & Superego
7/16/2023
William D. Cohan
Notes on the extension heard round the world, the comp question, the deal hypotheses, and whether Iger at Disney is the living exception to the de Gaulle postulation.
Bob Iger’s two-year return trip to the Disney corner office has been extended—surprise, surprise—until the last day of December 2026, just as my Puck partner
Matt Belloni and I
predicted a few weeks ago. It seemed like Iger enjoys being back in the limelight, and he has not really done anything to position anyone to succeed him, despite the Disney board retaining Heidrick & Struggles and creating a subcommittee of the board of directors to focus on succession (as, of course, it should).
Meanwhile, during the course of his first year back in office, Iger’s burdens increased rather than diminished, and many of the strategic decisions he made during his original tenure—the
Murdoch deal, the challenges at Marvel, the uneven Disney+ strategy—have returned to haunt him and can’t fairly be blamed on his short-lived predecessor,
Bob Chapek, no matter how convenient. Anyway, it has not been a Hollywood ending: Disney stock has gone down about 4 percent since Iger returned to Burbank, and yet the hapless Disney board of directors had no choice but to believe that Iger alone could save them.
I’ve always loved the
de Gaulle aphorism that
the graveyards are full of indispensable men. (Indeed, this thought haunted my many long days and nights at Lazard, and elsewhere on Wall Street, as highfalutin bankers, perhaps the future subjects of
Dry Powder, pushed an endless stream of work across my desk.) The Disney board may feel this way, too, but I am told by my Wall Street sources that Iger took the two-year extension only “reluctantly.” That seems hard to believe, although he did say in his now famous tone-deaf interview with CNBC’s
Dave Faber on the “sidelines” of the Allen & Co. Sun Valley conference last week that he did enjoy his brief 11 months of retirement and only came back to Disney because the board of directors asked him to return. (A Disney spokesperson declined to elaborate beyond what Iger told Faber.)
There’s plenty of revisionist history there, of course. Iger wasn’t a retirement guy. His effort to buy the Phoenix Suns didn’t amount to much, his personal investment portfolio seemed semi-cocked, his Thrive Capital affiliation seemed only partly heartfelt, and obviously he wasn’t going to become president. Iger has been associated with Disney or its entities for a half century, after all, and he has always been well compensated by the company. (Not nearly as well compensated as
David Zaslav, but that’s another story.) In fiscal year 2021, Chapek received total compensation of $32.5 million; Iger, who was the executive chairman of the Disney board of directors, received
$45.9 million.
It looks like Iger took a pay cut when he returned as C.E.O. His salary was $1 million with the potential for a $1 million bonus, plus an annual stock grant of $25 million. During the partial fiscal year of 2022, Iger received $15 million, according to the 2023 proxy statement. In his new deal, signed July 12, Iger not only extended his contract to the end of 2026 but also will receive a potential annual incentive bonus of up to 5x his $1 million salary, or $5 million, up from the $1 million he agreed to when he returned in November 2022. I assume he’s still eligible for the same annual $25 million stock grant he agreed to before, although the new letter agreement between him and the company is silent on that detail. It’s probably just a given at this point. In other words, as part of his two-year contract extension, Iger now has the potential to make $31 million a year, up from $27 million a year.
The Second Iger Era
So, he gets a $4 million raise and his contract extension, for doing what exactly? The stock has been mostly flat, as I noted, since he returned. He did see off the activist investor threats from both
Dan Loeb and
Nelson Peltz, so he gets credit for that, I suppose, but I’m not sure that he really accomplished anything by doing so. He’s eliminated some 7,000 jobs, part of a promised $5.5 billion cut to Disney’s expenses. But he’s been unable to stem the losses at Disney+ and Disney’s other direct-to-consumer businesses, including ESPN+ and Hulu, which collectively have lost some $10 billion since Disney started reporting their financial performance in 2019.
Disney has promised that streaming would be profitable by September 2024, although that goal may be rather elusive at the moment. Only Netflix has been able to figure out how to make streaming profitable; all the others are losing money, although Warner Bros. Discovery’s streaming businesses could be profitable in 2023, or so the Zaz has said. Iger’s restructuring of the company, designed to return authority to the creative types, will take time to produce box-office gold; meanwhile, the various movies coming out of Disney’s studios—
Elemental;
Ant-Man and the Wasp; the remake of
The Little Mermaid; and, yikes, the reported $300 million spent on the final
Indiana Jones installment with
Harrison Ford in the lead role—have been disappointing, at best. (One notable exception was the second
Avatar film, which grossed more than $2.2 billion in global box office revenue.) There have been some “creative misses,” Iger acknowledged in the CNBC interview, presumably blaming them on Chapek, but he’s the one who designed Disney’s modern wring-the-I.P.-sponge-dry value creation strategy.
Traffic at various Disney theme parks has been relatively tepid, too, according to the
Wall Street Journal. (In his CNBC interview, Iger said the
Journal article was “not accurate actually” because it didn’t “factor in” 100-degree temperatures in Florida, with 99 percent humidity. This put me in the mind of retailers who often blame “the weather” for poor sales.) He remains in a political, and now legal, fight with Florida governor
Ron DeSantis. The company is also still grappling with net debt of some $38 billion, thanks in large part to Iger’s 2017 decision to consent to a bidding war, with
Brian Roberts at Comcast, for Murdoch’s 21st Century Fox. Iger won the battle, paying some $71.3 billion for Fox, but Disney may now be losing the war. The Fox assets have yet to provide much of a return on the hefty purchase price Iger paid but the debt Disney took on is relentless and demands service.
Iger will also probably have to pay a fresh $10 billion to Comcast to buy the one-third of Hulu he doesn’t already own, unless he takes my advice and swaps Disney’s 80 percent of ESPN for that Hulu stake. (This is not investment advice.) He admitted in the CNBC interview that after he came back he studied whether Disney should buy the last third of Hulu that Comcast owns. He decided, he said, “We would be better off having Hulu than not having Hulu.” So, Bob, if that’s the case, why not get a little creative in your dealmaking? There’s an opportunity here to solve a few strategic problems at once, with Hulu as the bait.
He’s also not been able to do anything to stem the decline of Disney’s linear TV offerings at both ABC and ESPN. As part of his “everything is on the table” world tour, Iger conceded that Disney’s linear TV assets—especially the ABC television network and its station affiliates (where Iger got his start)—may have to go on the block, although I’m struggling to imagine who would want to catch that falling knife and what they would pay for it. I could feel the shudders emanating from West 66th Street in my bones after that comment.
Iger also said, once again, that ESPN might need some help, even though he claimed to love the business. “If you look at today’s media landscape, sports stands very, very tall in terms of its ability to convene millions and millions of people all at once,” he said. “There’s almost a guarantee that that occurs. It’s an advertiser’s dream.”
That comment probably made
Jimmy Pitaro pretty happy. But, he also said, he was open minded about the need for a “strategic partner” for ESPN, one that could be helpful with either “content or distribution.” To me, this is Iger code for doing a deal with Comcast for ESPN, or as an investor in ESPN, as part of the Hulu swap.
Of course, Comcast has both content and distribution that would be useful for ESPN. In fact, I could envision a situation where Comcast takes control of ESPN, with at least a 51 percent stake in the business, in exchange for its one-third stake in Hulu. (It’s the same kind of structure Comcast used to get full control of NBCU from GE back in the day.) I’m sure there might be others who might be interested in a strategic investment in ESPN, perhaps Apple or Amazon. Or any number of the big private-equity firms with dry powder to burn, including Blackstone, KKR, Apollo and others.
But, in my opinion anyway, Comcast has the best currency in the form of its one-third stake in Hulu, and its abiding interest in sports. Comcast owns the Golf Channel, USA Networks, as well as Comcast Spectacor, which owns and operates the Wells Fargo Center arena and complex in Philadelphia as well as a portfolio of professional sports teams that includes the National Hockey League’s Philadelphia Flyers, the Overwatch League’s Philadelphia Fusion, the National Lacrosse League’s Philadelphia Wings, and the Maine Mariners of the East Coast Hockey League. Comcast Spectacor also holds strategic interest in several partner companies spanning the sports and entertainment landscape, including Spectra, Learfield, XFINITY Live! Philadelphia, and N3rd Street Gamers. (I will have more on the whole unfolding ESPN drama on Wednesday.)
Here’s how this might work: In exchange for Comcast’s $10 billion Hulu stake, Comcast gets 51 percent of ESPN. That would value ESPN at around $20 billion. Is that the right value for ESPN? Hard for outsiders to say at the moment since Disney doesn’t break out ESPN’s numbers separately—although that is slated to happen next year. But I am sure any number of investment bankers would be delighted to perform the ESPN valuation exercise with numbers from Disney. And then whatever valuation for ESPN is agreed to, Comcast can top up the purchase with cash, if needed, to get to its 51 percent stake.
Disney would get full control of Hulu and perhaps some cash to pay down debt. Comcast would get 51 percent of ESPN (for now), Disney would keep 29 percent of ESPN, with Hearst holding onto its 20 percent, unless it wants to sell now to Comcast, too. Disney gets the partner for ESPN that Iger alluded to wanting plus can use any cash it gets to pay down a portion of its $38 billion of debt. This seems like the way to go here, although I can’t speak to the tax implications of such an arrangement and whether they would be onerous, or not. (I would welcome readers’ thoughts on this.)
And that leaves Bob with his most important deal still left to do: Finding a successor. He’s not alone in that important task.
Jamie Dimon needs to find a successor too, as does
Brian Moynihan, at Bank of America. In fact, there is a mini-epidemic afoot in the land of C.E.O.s at big, important companies who don’t want to seem to exit the stage.
He says he’s on the task—as supposedly is the Disney board and its outside headhunter—but there’s very little evidence that much progress has been made, hence Iger’s wholly predictable contract extension.
In the CNBC interview, Iger glossed over the succession dynamic at Disney, opting instead for the usual corporate word salad preferred by C.E.O.s when they are put into an uncomfortable situation. He conceded the “succession process” was not going “to stop.” And then he hinted at the kind of person who would be the one selected to follow him. Someone with “real passion” for the Disney businesses and someone who was an optimist.
Shocking revelations, Bob. “Optimism is a major quality of a great leader,” Iger told Faber. “No one wants to follow a pessimist. We’re optimists about the future of this company. We’ve gotten at the work already. We know what we have to do. There’s light at the end of the tunnel in the most challenged businesses, and there’s an unbelievably bright future for the businesses that are less challenged.”
As my partner
Dylan Byers reported, Iger brought Disney Entertainment co-chair
Dana Walden with him to Sun Valley, along with film chief
Alan Bergman and theme parks head
Josh D’Amaro. (Pitaro was left back in Bristol, tending to ESPN.) But he didn’t mention any of them by name in the interview with CNBC. Maybe that was intentional because Iger probably knows, deep down, that he can’t choose a parks guy again to run one of the world’s largest media companies. He probably can’t choose a studio executive either; their experience is too narrow for the breadth of the job. And if ESPN is going to Comcast at some point soon, Pitaro isn’t right either. Maybe Iger needs to redesign Disney to be able to find the right leader for the company going forward?
In any event, all eyes remain on Iger here to make the right decision this time. His entire 50-year legacy at Disney rides on making a smart choice, one that will inspire the troops and Wall Street investors. Yes, he’s bought himself some more time. But he’d better get cracking on it. Maybe Dimon would be interested, if he decides not to throw his hat in the presidential ring?
I'd rather have Tim Apple own it.
