Monday, December 18, 2017

So there we were, watching Season 2 of Shuteye on Hulu, when we realized: Disney and 21st Century Fox both own stakes in Hulu! If this sale of Fox assets to Disney goes through, Disney will own a controlling stake in Hulu!

What might that mean for Hulu’s valuation? What about Comcast and Time-Warner, the other owners? And how much money is Hulu making or losing these days, anyway?

Few people can know the full details, since Hulu is a private company. But all its owners are public companies — and yes, with some clever searching of the Calcbench data archives, you can find some answers.

First, let’s review Hulu’s ownership structure. As we noted in a post from 2016, Hulu originally had three owners, each with a 33 percent stake: Disney, Comcast, and Fox. Time-Warner bought into the operation in August 2016, acquiring a 10 percent stake and diluting all everyone else’s holdings to 30 percent.

So if the Fox sale goes through, Disney will own a 60 percent stake in Hulu. That has strategic implications galore which we’ll revisit further down. Now let’s try to get a fresh look at Hulu’s financial operations.

The simplest way to do that is to create a peer group of Hulu’s four owners, and then search their footnote disclosures for “Hulu.” Then the nuggets start to shake loose…

We Know Hulu Loses LOTS of Money

In its fiscal 2017 earnings report, filed on Aug. 9, Fox reported losses of $379 million from “other equity affiliates,” of which Hulu is one. That amount is lower than than the $417 million reported for fiscal 2016, but several businesses are lumped into “other equity affiliates” along with Hulu, so we’re not clear how much the performance of each one affected the total.

Fox did say, however, that the increase in losses “primarily reflects higher equity losses from Hulu…”

Along similar lines, Disney had an earnings statement on Aug. 8 that reported “equity income of investees” that fell 18 percent in second-quarter 2017 to $127 million. Where did that loss come from?

“Equity in the income of investees decreased due to a loss from our investment in BAMTech, which we acquired in August 2016 and January 2017, and higher losses from Hulu, partially offset by higher income at A +E Television Networks … The decrease at Hulu was due to higher marketing and labor costs, partially offset by higher subscription revenue.”

Comcast, however, gives us the really juicy stuff. From its annual report filed last Feb. 23: “In 2016, 2015 and 2014, we recognized our proportionate share of losses of $168 million, $106 million and $20 million, respectively, related to our investment in Hulu.”

Assuming Hulu lost money in equal increments from one month to the next (a big assumption, we know); and Comcast was responsible for 33 percent of the loss in the first seven months of 2016, and 30 percent for the remaining five months; that implies a total loss in 2016 of roughly $527 million.

Also, if Comcast recorded a $20 million loss in 2014, when it owned one-third of the company — that means Hulu’s losses went from $60 million to more than $500 million in only three years. Yikes.

We Know About the ‘Hulu Indemnity’

When Time-Warner bought into Hulu last year, Fox disclosed this item:

For a period of up to 36 months, under certain limited circumstances arising from regulatory review, the new investor may put its shares to Hulu or Hulu may call the shares from the new investor. If Hulu is required to fund the repurchase of shares from the new investor, the Company has agreed to make an additional capital contribution of up to approximately $300 million to Hulu.

Translation: if Time-Warner sells back its stake to Hulu, and Hulu has to buy those shares at a loss, Fox will offer up to $300 million to fund the purchase.

Circumstances relating to a regulatory review… like, say, a merger? Maybe one that leaves Disney as majority owner of Hulu, and therefore weakens the control that remaining shareholders have?

The above paragraph is speculation on our part. Nonetheless, the fact remains that if this sale proceeds, Disney will be majority owner of Hulu. That fits neatly into Disney’s other plans, such as starting one or more streaming services of its own, and pulling Disney content from Netflix. And the remaining two owners, Comcast and Time-Warner, will see their hold over Hulu diminish relative to Disney’s power.

We at Calcbench don’t know what this all means. Still, for financial analysts trying to find answers, there is data out there to help you ask better, more informed questions. We’re happy to help you find it.

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