Like many of us, The Walt Disney Co. has had one heck of a 2020.
What should have been a victory lap as the company enhanced its newly launched and popular Disney+ streaming service to complement its already strong positions in theme parks, sports and entertainment franchises turned into a nightmare as COVID-19 froze many of the company’s business lines virtually overnight.
While the Disney+ story remains a bright spot and has allowed the company at least some “stay at home” appeal as a stock, there is no question the company has had to deal with many ongoing challenges throughout 2020. Since reopening Disney World in Florida attendance has been below expectation as domestic air travel remains depressed and incoming international tourism is still mostly non-existent. Disneyland in California remains entirely closed due to a restrictive health and safety stance taken by California’s governor. Sports are back, helping Disney’s ESPN franchise, although headlines suggest TV viewership has been below average for key bets such as NBA basketball, while in-person fans remain mostly excluded, depressing team revenues.
All of these challenges have landed in the lap of new CEO Bob Chapek, who officially stepped into the role replacing the legendary Bob Iger, just weeks before the pandemic gripped the world.
Adding to Chapek’s already full plate is the recent disclosure that notable activist investor and hedge fund manager Daniel S. Loeb and his firm Third Point LLC has upped his stake in the company and aired public recommendations for changing strategic direction. This has implications for Disney’s executive team and all of its current investors, because activist investors typically assert their opinions publicly. In the case of Daniel Loeb, it was no different; read on to find out his plans and what this means for you if you hold DIS stock for the long-term.
Who is Daniel S. Loeb?
Daniel S. Loeb is a billionaire hedge fund manager who founded Third Point, a New York based hedge fund in 1995. Third Point LLC manages about $15 billion in investor assets at the time of writing. Daniel Loeb’s personal fortune is estimated at just shy of $3 billion according to Forbes, who also places him at #295 on the Forbes 400 list and #743 on their list of Billionaires for 2020. He attended Columbia University and was a classmate of Barack Obama’s, according to the Wall Street Journal.
Third Point’s largest fund has built a strong track record of performance, returning 14.5% annualized from 1996 through 2019, according to self-reported results available on GuruFocus. The fund had even stronger performance, closer to 20% annualized, before suffering sharp losses like most during the 2008 global financial crisis in which the fund reportedly lost 33%.
In addition to his hedge fund business Third Point Management, Loeb also runs the publicly traded reinsurance company Third Point Re (stock ticker: TPRE) and Third Point Offshore Investors Limited, a closed-end fund that invests directly in Third Point’s hedge fund, available to retail investors in the OTC market (ticker: TPNTF). Loeb also runs Far Point Acquisition, a special purpose acquisition company (SPAC) or “blank check company,” that merged with payments processor Global Blue in August 2020 after a rocky courtship.
Daniel Loeb has the reputation in financial media as an aggressive activist investor, in a similar mold to fellow hedge fund star and rival Bill Ackman. Activist investors like Loeb and Ackman tend to take large positions in public companies and then apply public pressure through open letters and media appearances to try to force changes from company management. In fact, according to the Wall Street Journal, Loeb is know for his “poison pen” because he is unsparing in calling out underperforming or misguided executives at the companies he targets.
What is an Activist Investor?
Activist investors come in many different varieties, but the common thread involves a willingness to put pressure on a company to make changes.
Activist investors can have an ESG focus, where they might pressure companies with poor environmental records to improve their standards, add more diversity to their executive teams, or clamp down on egregiously high executive pay.
Some activist investors specialize in sniffing out fraudulent companies and combine their outspoken views with a short position in a stock, wagering their research and ability to get the word out will drive down the price of the stock and drive up their profits.
In Daniel Loeb and Third Point’s case, he has a track record of targeting some of the largest and most well-known companies in the world and pushing for reorganizations and break-ups of these companies in order to unlock greater shareholder value.
Activist investors such as Loeb use a variety of tactics to achieve their goals in creating change at a target company. Many activists with reputations will rely on simply taking a position in a company knowing that the financial media will create headlines as a result of discovering the 13f filings, which are required to be filed by hedge funds in disclosing their positions on a quarterly basis. Other activist investors will seek to keep their constructive ideas private between themselves and the company, so long as they feel their suggestions are being seriously contemplated by management.
However, many activists thrive on conflict and publicity. More aggressive tactics include open letters, appearances on CNBC and Bloomberg TV to discuss their activist positions and making shareholder presentations public both online and at famous hedge fund conferences such as the Ira Sohn Conference. Even more aggressive is when activist hedge fund managers push for changes to the board of directors and even place themselves on the board, as Loeb has also done in some notable cases.
As Barron’s has reported, the simple association of an activist investor with a company is often enough to have a major short-term and long-term impact on the stock price. Many average investors attempt to replicate the positions of activists and seek out companies that are likely activist targets. However, activist investors don’t always achieve their stated goals and messy battles with their target companies can distract management over a long period and potentially negatively impact the stock. Sometimes activists will enter a position, do very little as the stock rises in anticipation and rumors and then simply exit the position before any tangible changes occur, pocketing a nice return along the way.
Other concerns are the short-term nature of some activist hedge funds that may encourage moves to benefit their position (such as excessive demands to return cash to shareholders or asset stripping), but hurt the health of the target company long-term.
Notable Investments by Third Point LLC
A short and non-comprehensive list of notable public companies that Daniel Loeb has tangled with includes:
- Yahoo (2011- 2013) – Loeb’s reputation was burnished through his influential work in reshaping the board of Yahoo and installing Marissa Mayer as the CEO. Third Point took an initial 5% stake in the company in 2011 and then waged a “proxy fight” on Yahoo’s board. Loeb pushed Yahoo to hire a visionary CEO with a product focus and to unlock the value of stakes the company had in both Yahoo Japan and Chinese e-commerce giant Alibaba. After pushing through changes at Yahoo, Loeb eventually resigned his board seat and sold the majority of his position in 2013, profiting to the tune of $1 billion, according to Business Insider.
- Sony (2013-2014, 2019-present) – Loeb has been less influential with the Japanese conglomerate’s management than he was with Yahoo. In 2013, Loeb took a roughly $1 billion stake in the company and proposed that Sony spin off its movie business. The proposal was rebuffed and Loeb exited his position the following year, reportedly after making a 20% gain on his original investment, according to Barron’s. Undeterred by his lack of influence in this first episode, Loeb returned to Sony in 2019, this time taking a $1.5 billion stake along with making a proposal that Sony spin off its semiconductor business. Loeb wants Sony to focus on its core businesses, put its high levels of cash to work and focus on reinforcing its position as a premiere entertainment company. Sony’s management has again been cool on the proposal thus far, although notice of Third Point’s investment has seemingly had a positive effect on the stock price.
- Nestle (2017 – present) – Loeb’s Nestle campaign is a great example of the variety of stops an activist hedge fund manager will pull out when trying to gain influence over a company’s strategy. As part of his push to make Nestle’s executive team simplify both its business lines and management structure, Loeb released a letter with his demands quickly made public by the financial media. But he didn’t stop there. He also published a detailed 34 page presentation and even published a web site NestleNow.com to publicize his demands. While the ultimate success of this investment is yet to be determined as Third Point still holds the company in its fund, it’s clear that Loeb has been encouraged by Nestle’s progress as he has indicated as much in his shareholder letters, while the price of the stock has been on a clear uptrend since the summer of 2018.
Other positions Third Point holds or has held include: Baxter, Netflix, Apple, Honywell International, Prudential, Snowflake and EssilorLuxottica, the maker of Rayban sunglasses and other eyewear.
It’s important to note that not all of Third Point’s positions are treated as activist positions and some such as Apple and Netflix have been held passively by Loeb with little in the way of assertive demands.
What Does Daniel Loeb Want Disney to do?
In early October 2020, Loeb set out a plan for The Walt Disney Co. to change the focus of its business to more aggressively support its streaming platform Disney Plus, by reallocating up to $3 billion from its dividend to fund more original content. The plan was detailed in a letter to CEO Bob Chapek and was quickly made public by a number of financial media outlets, including the Financial Times.
Loeb’s thesis is that by reducing the dividend incremental by a few dollars, added investment in Disney+ could result in the company outcompeting Netflix within a few years. This in turn would result in profitability of many multiples more than the stock’s current dividend yield.
The move was considered “radical” and “unusual” for a number of reasons. Typically activist investors push for more cash to be returned to shareholders in the form of dividends and buybacks, not less. As mentioned, activist investors have a bad reputation in some corners for putting short-term profits at the expense of long-term growth. Here, however, it appears Loeb is suggesting the opposite: investing for a number of years in the future growth of the company at the expense of easy money in the form of current dividend payments.
The Financial Times reported that Third Point added to its position in Disney during the coronavirus market sell-off at a time when the future of its movie and theme par business were in doubt. Before that purchase, the latest regulatory disclosures indicate that Third Point holds $676 million worth of DIS stock, or about 0.3% of the total company.
How Has Disney Responded to Third Point’s Proposal?
Within just a week of Third Point’s proposal being made public, Disney CEO Bob Chapek announced a major reorganization of the company’s media and entertainment divisions to focus on streaming.
In an interview with CNBC, Chapek sounded as if the company’s executive team was on a very similar wavelength to that of of Third Point’s proposal:
“We are tilting the scale pretty dramatically [toward streaming],” Chapek said on “Closing Bell,” noting that the company is looking at all investments, including dividends, as it seeks to increase its spend on new content. Chapek said the board of directors will have the final say on Disney’s dividend payouts.CNBC.com, Disney reorganizes to focus on streaming, direct to consumer
Investors reacted positively, sending the shares up about 5% on the news of Disney’s plans. Investors have been generally enthusiastic about anything to do with Disney+, with the launch of the service driving up the company’s stock price significantly as some speculate that the market could treat Disney more like Netflix in terms of valuation as the former expands its subscriber base.
Third Point Capital and Dan Loeb seemed pleased with the move, as well:
Loeb told CNBC, “We are pleased to see that Disney is focused on the same opportunity that makes us such enthusiastic shareholders: investing heavily in the DTC business, positioning Disney to thrive in the next era of entertainment.”CNBC.com, Disney reorganizes to focus on streaming, direct to consumer
What Does Third Point’s Proposal Mean for Disney’s Investors?
Like many companies and the broader economy itself, Disney is facing years of accelerating trends materializing in a matter of months as a result of the pandemic and changing consumer behaviors.
Loeb is clearly pushing the company away from its traditional powerhouse businesses of theme parks and theatrical film releases at a time these businesses are hobbled by ongoing concerns about in-person activities. Instead, he wants Disney to capitalize on its strong position in intellectual property and popular franchises to build out superior original content for its streaming platform at a time when the market values subscribers for such services at “$1,200 per subscriber,” according to Loeb’s letter to Disney.
While it’s far from certain that Disney will listen to all of Loeb’s suggestions, it’s clear they agree on the general direction. This likely will mean a different Disney in the coming years, one focused more on providing in-home entertainment and less experiential products and services. The company’s decision to lay off 28,000 theme park workers shows the extent of the company’s concern about the future of that business, at least in the near term.
As a Disney investor, one might be excited by the company transforming itself into a hybrid entertainment and technology company and the associated valuation that could bring in time. One must also balance these hopes with realistic expectations for the legacy business lines at a time when the customer base for in-person sports, movies and theme parks is limited.
Disney investors should keep an eye on Dan Loeb as long as he is invested in the company. His track record, especially on activist investments, has been solid. So far, management’s alignment with Loeb’s vision can be viewed in a positive light for current shareholders.