Complex Hulu Deal Simplifies Things for Disney

(Bloomberg Opinion) -- They say canceling cable is hard. But that’s nothing compared to the hoops Comcast Corp. is making Walt Disney Co. jump through for Hulu.

On Tuesday, Comcast and Disney struck a deal, sort of, regarding the future of Hulu. Disney said it has taken “full operational control” of the streaming service, and Comcast said it will ultimately sell its 33% Hulu stake to Disney — just not for a few more years. Indeed, in the most complex arrangement the companies could have possibly come up with, they’ve entered into a “put/call agreement” that won’t be exercised until at least January 2024. It stipulates that at that point, Comcast can require Disney to buy out its interest in Hulu, just as Disney can require Comcast to hand over that interest.

The eventual transaction price will be determined by “independent experts,” though Disney has guaranteed a minimum value for Hulu of $27.5 billion and a payment of at least $9 billion to Comcast (or $5.8 billion, should Comcast allow its ownership to be diluted by not contributing to Hulu’s future capital calls). For perspective, Disney expects Hulu’s operating losses to peak at $1.5 billion this year, then sees the business turning profitable in fiscal 2023 or 2024. Hulu was most recently valued at about $15 billion when AT&T Inc. sold its 9.5% stake back to the business last month.

The accord, however complicated, does address what Disney and Comcast each would like to get out of Hulu at this point. Disney wants to bring Hulu in-house and bundle the service with its two other streaming-video products, ESPN+ and Disney+. This deal tidies things up before Disney+ launches Nov. 12, giving the company time to structure an attractively priced package for consumers who want more than just Pixar films and the new “Star Wars” series, and would rather have something more akin to a traditional cable package.

The drawbacks of Hulu’s previously complex ownership structure also could be seen in its operational struggles. Despite being Netflix Inc.’s main competitor, it has just 25 million paid U.S. subscribers, compared with Netflix’s 60.2 million. Going forward, Hulu should benefit from reporting to just one set of managers — and arguably the industry’s best, the Disney team.

For Comcast, it ensures a handsome payout for a business with which it never seemed that enamored. The cable giant can retain its stake, do little to help Hulu over the next four and a half years, and then exit with at least $5.8 billion — likely more, given Disney’s expertise and the power of a Disney/Hulu streaming bundle. Disney predicts that by then, Hulu may have almost as many subscribers as Netflix does now. But in three years, Comcast’s NBCUniversal will also have the option to end most of its content licensing agreements with Hulu.

The year 2024 is set to be an inflection point for Disney: Disney+, ESPN+ and Hulu are all expected to be making money by then, and Comcast will likely come knocking, ready to cash out on its Hulu billions. But an even bigger change will take place before then — in 2021 — when Disney CEO Bob Iger retires. Everything he’s doing now is in preparation for the collapse of the traditional TV model, which still drives more than $7 billion of Disney’s annual operating profit. Asked in a recent interview when that will take place, Iger said, “I don’t see it happening during my tenure here.”

Comcast made $454 million in cash capital contributions to Hulu in 2018.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

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