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- Disney will almost certainly buy Comcast’s stake in Hulu, but it will not be cheap.
- The valuations of the two companies for the streamer are said to be tens of billions of dollars apart.
- Analysts at Disney and private equity insiders shared their thoughts on how much Hulu could be worth.
When it comes to Hulu, value is determined by the viewer.
According to a 2019 agreement between the rivals that set the floor price for Hulu at $27.5 billion, Disney owns two-thirds of the streaming service and is looking to buy the remaining third owned by Comcast. Acquiring Hulu and integrating it into Disney+ is a top priority for CEO Bob Iger, who believes that Disney’s success in streaming will make or break his second tenure.
According to Bloomberg, Comcast claims Hulu is worth twice what Disney claims, even in a difficult media environment. The parent company of NBCUniversal is unlikely to sell its stake in Hulu to a competitor at a loss, especially since doing so would jeopardize the progress of Peacock, its flagship streaming service. That is why Comcast CEO Brian Roberts has pushed for Hulu to be valued as if it were a publicly traded company.
“It’s what a willing buyer in a robust auction would pay,” Roberts said of Hulu’s valuation in May during a MoffettNathanson conference. “If it was actually for sale in that way — and that’s our job — to then give us one-third of that value.” So I believe we are in a very advantageous position.”
Disney has the right to buy the rest of Hulu in January under the current ownership structure. In contrast, Comcast could force Disney to buy that portion of Hulu in early 2024, even if the Mouse House refuses. If the two parties can’t agree on a price, an independent arbitrator will be given full access to Hulu’s financials to determine a fair valuation.
There appears to be a canyon-sized gap between Disney and Comcast’s assessments of Hulu, and tensions between the two longtime rivals are high. According to The Wall Street Journal, Comcast went after Disney for not launching Hulu in other countries, which the cable company claimed hurt the streamer’s value and lowered the value of its stake.
Insider spoke with five media analysts and a private equity guru to learn more about Hulu’s true worth and how it will be determined if the two companies reach an impasse, which appears to be the case. Multiple requests for comment from Disney went unanswered. Comcast did not respond to requests for comment.
Despite Disney’s limbo attempt, Hulu’s valuation may not hit the floor
Hulu should be valued far more than the $27.5 billion floor, according to two Disney analysts, but other sources say the streamer’s value does not match Comcast’s claims.
Tim Nollen, a Macquarie analyst with a neutral rating on Disney shares, believes Hulu is worth between $35.5 billion and $37.5 billion, implying that Disney should be prepared to pay around $12 billion for Comcast’s stake.
Nollen’s estimates are based on $12.5 billion in revenue, $235 per year in blended average revenue per user (ARPU), and 53 million subscribers (48 million for the flagship product and 5 million for its $70-per-month pay TV product). According to him, Hulu’s enterprise value (EV) should be approximately three times its revenue, or roughly half of the industry leader Netflix’s 5x to 6x EV-to-revenue ratio. Another method of valuing Hulu is to compare its EV-to-subscriber ratio to that of Netflix.
Nollen noted in a note late last year that Hulu is attractively valued relative to Netflix on an EV-to-subscriber ratio, despite the fact that it lacks the dominant streamer’s scale and international presence.
So, while Nollen believes Comcast is correct to want an above-floor valuation for Hulu, he recently stated that suggesting the streamer should have the same multiple as Netflix is absurd. Nonetheless, he believes Iger should pay a premium for Hulu in order to improve Disney’s overall content offering while bolstering its advertising business.
That reasoning is shared by Matthew Thornton, a Truist analyst who is bullish on Disney. Based on $12.6 billion in revenue for 2024 and a 2.7x EV-to-revenue ratio, his model values Hulu at $34.3 billion, which he prefers to the less common EV-to-subscriber valuation method. According to him, Disney should be prepared to pay at least $11 billion for Comcast’s stake in Hulu.
Others who spoke with Insider were less convinced. Hulu is valued at the low end of its valuation range, according to Barton Crockett, a Rosenblatt Securities analyst with a buy rating on Disney. He noted that Wall Street’s view of streaming services is much bleaker now than it was in 2021, and that there is a serious risk that Hulu will be worth even less in the future.
“On the open market, I think they’d get something close to the floor,” Crockett predicted for Hulu.
In his model, Brandon Nispel, a KeyBanc Capital analyst who is neutral on Disney stock, values Hulu at $27.5 billion. Even a $40 billion valuation would put Hulu at a premium to Netflix, according to Nispel, which he believes is highly unlikely.
So, if a third-party evaluator is appointed, Nispel believes Disney will prevail.
“My guess is that when it goes to an independent arbitrator, they’ll come to something in the middle but will probably err on the side of conservatism,” Nispel said.
Citigroup analyst Jason Bazinet, who rates Disney as a buy, disagreed. He suggested that Disney negotiate a deal quickly because a mediator might side with Comcast, leaving Iger with an overpriced cash-burner that would eat into earnings.
“Obviously, if you’re Disney, you’d like to negotiate some sort of settlement before it goes to the third-party appraiser because it just de-risks your situation,” Bazinet explained to Insider. “What if the third-party appraiser comes back with an outrageous figure?” You’re responsible for that.” By the same token, he added, Comcast has a financial incentive not to reach an agreement.
According to Bazinet, a neutral party could drive up Hulu’s price by valuing it based on EV-to-revenue or EV-per-subscriber rather than its minimal earnings power. He noted that the streamer does not generate much cash flow and is unlikely to boost profits, so it may be dilutive to Disney.
“Your earnings are going down because you’re now going to have to pay interest on $10 billion in debt, and you’re going to own 100% of something that doesn’t generate profits or generates very little profits,” Bazinet explained. “If you’re a Disney shareholder, you’re probably thinking, ‘What did I just get?'” ‘I have nothing.'”
Content isn’t the only reason Disney should add Hulu
Despite concerns that Disney will have to overpay for the rest of Hulu, analysts agree that the company must pay up so that it can use Hulu content to bolster Disney+, which has seen its subscriber growth slow.
“Today, I believe Disney+ is a distinct enough and focused enough brand to have value,” Crockett said. “The risk is that that will erode over time.”
Iger made headlines in March when he called Hulu’s content “undifferentiated.” He has since retracted that statement. However, the CEO’s bravado did not fool Bazinet, who pointed out that being undifferentiated does not imply being unvaluable.
“Undifferentiated content is critical,” according to Bazinet. “Take a look at what people watch on TV. Yes, sports broadcasts are the most popular, but there is a lot of undifferentiated content.”
While many streaming customers come to a service for original shows and movies, they tend to stick around for pre-existing library content, according to Bazinet. Furthermore, diversifying beyond its core franchises — its most distinct content — may be a wise move for Disney, given that consumers appear to be less enthralled with Star Wars and Marvel content.
Although Hulu’s customers and content can help Disney+ grow again, Nollen believes Hulu’s most valuable asset is its advertising technology. While many streaming services are just getting started with advertising, Hulu has been showing commercials for 15 years and is thus adept at targeting viewers with relevant ads based on their age, gender, location, and interests.
According to Davis Noell, a senior managing director at Providence Equity Partners, a private equity firm that was an early investor in Hulu, ad-supported streaming will become more popular as Disney and other media giants raise prices to appease investors. Disney can position itself for the next big media trend by purchasing the entirety of Hulu, according to Noell.
“One thing that’s always been true in media is that the consumer appreciates a free or low-cost option,” Noell explained. “Ad-supported TV has always been a huge part of media, and I believe it will continue to be, particularly as the price gap widens.” As a result, consumers will shift to that ad tier.”
When Disney recently raised the price of ad-free Hulu by 20%, it kept the ad-supported version at the same price because Netflix has demonstrated that ad plans can generate more revenue per month despite being less expensive.
With that in mind, Comcast understands that it cannot also offer Disney a discount on Hulu.