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Dan Loeb asks Disney to suspend the dividend, investing it in Disney Plus

Activist investor Dan Loeb is calling on Disney CEO Bob Chapek to end the company’s $ 3 billion annual dividend to divert more capital into new Disney + content.

Loeb sent his proposal to Chapek Wednesday in a letter, which CNBC saw. Loeb’s Third Point Capital is one of Disney’s largest shareholders and bought more shares earlier this year in support of Disney’s repositioning around Disney +, its flagship subscription streaming service.

Asking companies to suspend a dividend in favor of capital spending is unusual for activist investors, who typically push companies to do the opposite: return their money to shareholders. But Loeb argues that Disney stock can be traded more like Netflix if it can prove its best-in-class status via streaming and break out of the herd of traditional US media companies.

“By reallocating a dividend of a few dollars per share, Disney could more than double its budget for Disney + original content,”

; Loeb wrote. “The ability to drive subscriber growth, reduce churn and raise prices offers the opportunity to create tens of billions of dollars in incremental value for Disney shareholders in a short time and hundreds of billions once the platform reaches a larger scale “.

Disney stock was up about 1.8% in mid-day trading on Wednesday. Shares have fallen about 6% over the past year as the closure of theme parks and cinemas damaged Disney’s operations. Netflix shares are up nearly 95% over the same period.

Disney + growth prospects

Legacy media companies, such as Disney, Comcast’s NBCUniversal, AT&T’s WarnerMedia, and ViacomCBS, are moving from box office movies and cable TV to subscription streaming services. While Netflix and Amazon have years of lead in building a global streaming subscriber base, Disney said in August that Disney + has garnered more than 60 million subscribers, less than a year after the service’s launch in November 2019.

This is far ahead of the estimates given by Disney last year, when it said it would have 60 million to 90 million Disney + subscribers by 2024. The company’s rapid buildup of subscribers makes Loeb believe that pumping money into Disney + both better use of capital than paying a dividend and will further separate Disney from its peers, which have struggled to trade at the same comparable multiples as Netflix.

Although Disney was able to woo subscribers with its extensive catalog of films, “Star Wars” and Marvel content, it didn’t spend much on original programming. Netflix could spend more than $ 17 billion this year and more than $ 28 billion by 2028, according to estimates by BMO Capital Markets. Disney said last year that it plans to spend about $ 1 billion on Disney + original content in its fiscal year 2020 and only $ 2.5 billion by 2024. Some of that original content has been further delayed by the pandemic quarantines, which have stopped production.

“A more aggressive content roadmap will set Disney apart as the only mainstream US media company capable of thriving in a world beyond the box office and cable TV ecosystem, alongside digital companies like Netflix and Amazon,” he said. written Loeb.

Loeb’s letter follows fellow activist Nelson Peltz’s investment in Comcast, another traditional US media giant. Trian has not yet made public his wishes with Comcast.

Disclosure: Comcast’s NBCUniversal is the parent company of CNBC.

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