Friday, November 22, 2019

Disney Corp. filed its 2019 annual report this week, and devout readers of this blog know what that means — more Hulu news!

After all, Disney ($DIS) has been a long-time investor in Hulu, along with Fox Corp., Comcast (now NBC Universal), and Time-Warner. We’ve written about Hulu numerous times over the years, trying to piece together its financial picture from morsels of data those four firms disclose. Since Hulu itself is a private company, assembling a complete picture has been hard to do.

But earlier this year, Disney acquired most of Fox’s assets, including Hulu. That led to big changes in Hulu’s ownership structure and disclosures about its operations — and with Disney’s most recent annual statement, we’ve hit paydirt.

Let’s begin with how much Hulu is worth. Consider the following table from Disney that shows the purchase price allocation for its $69.5 billion acquisition of Fox assets back in March.

First, Disney updated its allocation from the original deal value in March. That’s unusual, but whatever, we’ll get into that another day. Look at the second to last line, where Disney values its original 30 percent stake in Hulu at $4.737 billion as of Sept. 30. That implies a total value of $15.79 billion.

Above that table is the footnote disclosure about Disney’s acquisition of Fox, and there we find much more information.

For example, we already know that with the Fox acquisition on March 20, Disney owned 60 percent of Hulu: its own 30 percent share, plus Fox’s 30 percent share. Then Disney bought out the 10 percent share owned by Time-Warner for $1.4 billion — which makes sense, because that would value Hulu at roughly $14 billion back in April. Which is at least in the ballpark of the $15.78 billion Disney says Hulu is worth today.

Those deals, plus some other negotiating, left Disney owning 67 percent of Hulu, and NBC Universal the other 33 percent. And since the estimated value of Hulu is $15.78 billion, that means NBC Universal’s one-third share is worth $5.26 billion.

Remember that value. We’ll get back to it momentarily.

Does Hulu Make Money?

Well, duh, of course not. But Disney’s 2019 report gives us new insight into just how much money Hulu is losing.

Disney reports that from the date of acquisition (March 20) until the end of the fiscal year on Sept. 30, Hulu had $1.938 billion in revenue and $774 million in losses. If those are the numbers for six months, then we can reasonably guess that Hulu’s full-year performance is roughly double those numbers — $3.876 billion in revenue and $1.548 billion in losses.

That’s consistent with a prior estimate we made back in February, where we calculated that Hulu had lost around $1.5 billion in 2018, based on the share of losses its various owners were disclosing then.

One can hope that starting next year, Disney will report Hulu’s full-year performance annually and we can be done with the guessing games. For now, however, revenue of nearly $3.9 billion and net losses at 40 percent are a pretty good guess.

Now let’s get back to that NBC Universal stake worth $5.26 billion.

When the Bill Comes Due

After those machinations with Fox and Time-Warner, Disney struck a deal with NBC Universal. Starting in January 2024, either party will have the right to compel Disney to buy out NBC Universal’s remaining stake in Hulu (either Disney can force NBC Universal to sell it, or NBC Universal can force Disney to buy it) for fair market value or $27.5 billion, whichever is greater.

Let’s state that more simply for clarity. That one-third stake in Hulu, which is worth $5.26 billion today even though the business is losing money hand over fist? NBC Universal has the right to sell it to Disney four years from now at a 5X markup.

We have many questions about that proposition. For example, in the Business Description segment of Disney’s disclosures, Disney says that Hulu currently has 29 million paying subscribers. None of Hulu’s past owners had disclosed subscribership in earlier years, but one Hulu executive said in February that the business had 25 million subscribers back then, with double-digit subscriber growth.

So the 29 million subscriber number makes sense. But if you divide those 29 million subscribers into that $3.876 billion in estimated annual revenue, that’s $133 per subscriber, or roughly $11.15 per month. (We’re cheapskates here at Calcbench and get the $5.99 minimum package.)

For Disney to justify that $27.5 billion price coming due in 2024, that implies a huge increase in revenue per subscriber (read: higher subscription fees), or a dramatic cut in costs, or some mixture of both. Like, Hulu is nowhere near turning a profit right now — let alone generating enough free cash flow to justify marking up the value from $5.26 billion to $27.5 billion.

In theory, Disney could cut those Hulu costs; Disney does have a bottomless pit of entertainment content, and the pit just got even more bottomless with the Fox acquisition. But Disney is shipping its best content to its new streaming service, Disney+. (We’re two episodes into “The Mandalorian,” by the way. Seems promising.)

So what’s the strategic plan here? Disney runs rival streaming services, where at least one is losing a fortune and has a balloon payment of $27.5 billion due in four years? We don’t know.

We just know the details are in the data — and you can find all that data on Calcbench to tell your own tale.

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