Valuing Disney: What Is a Mouse Worth?

Published: February 13, 2004

ORLANDO, Fla., Feb. 12 - As top executives and advisers for the Walt Disney Company scrambled Thursday to deal with the Comcast Corporation's unsolicited bid for the company, their most pressing task was determining how much Disney was truly worth and at what price, if any, the company would be sold, people close to the company said.

Disney's bankers - Goldman, Sachs and Bear, Stearns - have begun working up valuation models that are expected to show that Comcast's $54 billion bid fails to appreciate Disney's value as a business and a cultural institution, an executive close to Disney said. It is unclear how quickly Disney's board will be presented with this material and how long it will take the directors to evaluate it. Some independent board members, meanwhile, have talked about retaining an outside lawyer to advise them as they navigate the repercussions of the Comcast bid.

Already here for a previously scheduled two-day conference for analysts, Michael D. Eisner, Disney's chief executive, declined to discuss any discussions among bankers, management and board members. But in an interview on Thursday, he said that the review process would include "a whole panoply of things" and that the board would consider every aspect of the proposal.

According to analysts and investment bankers, Disney's options range from hoping restive Comcast shareholders force the company to stand down to searching for a white knight. Some analysts also suggested that Disney could seek to make an acquisition of its own as a way to make itself a less attractive takeover target. But most of those options pose problems.

Many analysts and investors say Disney's priority will be to use price to deflect Comcast's overture. It is not unexpected that Disney's bankers would find the bid undervalued, and investors and analysts say the company could be worth $35 to $38 a share. On Wednesday, Comcast's stock offer was valued at $26.47 a share.

Mario Gabelli, a Disney shareholder who owns an asset management firm, said he thought Disney was worth $35 a share. And unless a higher offer comes along, Disney could have another year before it needs to do anything at all to appease investors. But, he added, "Disney still has to continue to drive economic value." That could be achieved several ways. Disney could choose to merge with another company. Tom Wolzien, an analyst at Sanford C. Bernstein, said Disney could make a defensive acquisition to bulk up, like buying the satellite company EchoStar or a radio company like Clear Channel Communications. Mr. Wolzien even suggested a real estate concern.

Other analysts suggested a movie studio like Metro-Goldwyn-Mayer, which has been looking for a buyer for its library.

But any acquisition could create an even deeper perception of weakness, perhaps prompting other suitors to emerge. And buying a satellite company like EchoStar would take Disney away from its corporate strategy of focusing solely on creating entertainment programming rather than investing in cable or satellite operations, moves that would only validate Comcast's strategy.

In a question-and-answer period with analysts on Thursday, Mr. Eisner said any acquisitions Disney would consider would be content-related.

The emergence of a white knight also seems increasingly unlikely. Few other giant media conglomerates, like Time Warner, could afford Disney's price tag. And recent political reactions against media consolidation could give any large deal difficulty with federal regulators. Another candidate mentioned over the years is Microsoft, which is an investor in Comcast but is expected to stay on the sidelines in the battle.

One old-fashioned way Disney could show shareholders it is creating economic value is to do it the way its executives proposed during nearly two days of meetings with analysts: double-digit earnings growth. As many on Wall Street expected, earnings rose sharply in the first quarter of 2004, in part because operating income in all divisions increased. Revenue for the quarter was $8.5 billion, compared with $7.1 billion in the quarter last year. The biggest gainers were the studio division and the media networks division, home to ABC and ESPN.

But almost every analyst interviewed here said that despite Disney's recent good earnings, they would have liked more financial analysis in the presentations to help them estimate how well Disney would perform. One analyst, who asked not to be identified, said most presentations were "high on concept, trim on financials." Mr. Wolzien, for his part, said "we've all been burned going after a movie or two," referring to the cyclical nature of the movie business.

"Their pitch is we are getting this fixed," he said.

While those may be options, any pronouncements would be premature. Mr. Mitchell said that the entire board had met for an hour by telephone on Wednesday morning and that it had not met since.

Several analysts suggested that the board was likely to reject the Comcast bid because it was too low. With Disney's March 3 annual meeting looming, a decision could come before then. Any offer Disney weighs will not be based solely on a dollar amount, they said, but also whether that amount is made up of stock, cash or both.

That is because media companies learned a lesson after the merger of AOL and Time Warner, when AOL used its inflated stock price to buy Time Warner. When AOL's earnings faltered, the stock price plummeted, despite Time Warner's rich assets in magazines, television and movies. Many media companies are now looking for stable value, Mr. Gabelli, the analyst, said.

One person involved in the deal said that Comcast was not likely to raise its bid. But even if it did raise its bid, several analysts said, it was questionable whether Disney would accept the offer if it was solely in Comcast stock. Disney executives are already talking about what effect the news of a merger could have on the company.

On Wednesday, several executives in Disney's finance team met in the bar of the California Grill on the 15th floor of the Contemporary Resort, where the investor conference was held. One person who attended said that two executives there expressed concern that Standard & Poor's had placed both Disney's long-term and short-term debt on a credit watch that morning, saying that the rating could be lowered if a stock deal with Comcast was made at the proposed price.

For the most part, company executives seem hunkered down for what many people think will be a protracted fight. On Wednesday night, the heads of Disney's divisions met for dinner, one person who was there said, and were told not to discuss corporate goings-on, fearing investor lawsuits. Several people expressed disappointment then that the encouraging news from the conference had been usurped by the Comcast bid. And company executives debated how public they should be in their own defense, another person said.

Independent directors, meanwhile, weighed whether to bring in a lawyer from outside the company. Such a move would be unusual, though not unheard-of, because most boards do so only when other board members have an inherent conflict of interest, and in this case, Mr. Eisner does not. Indeed, the executives suggested that the board might decide against such an action because it might be seen as divisive and could also be seen as undermining Mr. Eisner's authority.

When asked if the independent directors were talking about a lawyer, the company said it was not true.

Alan Schwartz, a top media banker from Bear, Stearns in New York, was at Thursday's conference and was seen slipping in and out of meetings and huddling with George J. Mitchell, the presiding director of Disney's board and a former senator. Disney has retained not only Mr. Schwartz, but Gene Sykes, a media investment banker at Goldman, Sachs who has a long relationship with Disney.

But by then, the mood at the conference, held at the Contemporary Resort in Walt Disney World here, had changed. On Wednesday morning, Mr. Eisner was somber when he entered the Fantasia Ballroom only four hours after hearing about the Comcast bid, quickly walking past photographers.

He was trailed around the hotel by a group of journalists. At one point on Wednesday, two photographers staked out a restroom Mr. Eisner had entered, but they were shooed away by a guard.

But by Thursday afternoon the chief executive's humor and composure had returned. When an analyst asked him if Disney was considering acquisitions, he joked, "We're buying Comcast." The crowd chuckled. He waved his arms at a bank of eight cameras and several more photographers and yelled, "Turn off the cameras."

Laura M. Holson reported from Orlando, Fla., for this article and Andrew Ross Sorkin from London.