Disney has been attracting the attention of activist investor ValueAct.

• Disney has become one of ValueAct Capital's largest investments after the company began buying it during the Hollywood strikes this summer.
• According to the Activist Spotlight, the activist has been in talks with Disney's management and is continuing to strengthen their stance.
• Disney's theme parks and consumer products businesses are valued at low $80s per share by ValueAct.

Disney's management has been in dialogue with ValueAct Capital, which has recently taken a significant stake in the company, according to the Activist Spotlight. This new stake was not previously disclosed in filings or media reports.

Here's a breakdown of the situation:

Company: Walt Disney Co.

Disney is one of the most renowned entertainment companies worldwide, with two segments: Disney Media and Entertainment Distribution; and Disney Parks, Experiences and Products. The company is involved in film and TV content production and distribution, as well as running television broadcast networks and studios.

Stock Market Value: $167 Billion ($91.07 a share)

Activist: ValueAct Capital

Percentage Ownership: n/a

Average Cost: low $80s per share

Over the past 20 years, ValueAct has been a leading corporate governance investor. The firm's principals typically hold board seats in half of their core portfolio positions, with a total of 56 public company board seats over 23 years. In their history, ValueAct has filed 89 13D's and achieved an average return of 57.57% compared to 17.52% for the S&P 500 over the same period.

Behind the scenes:

As evidenced by their board seats at Salesforce, Microsoft, and Adobe, ValueAct has a strong understanding of technology. Additionally, their investments in the New York Times, Spotify, and 21st Century Fox demonstrate their expertise in media.

Disney has been one of ValueAct's largest positions since the WGA and SAG strikes this summer, and the activist investor continues to grow their position in dialogue with Disney's management.

ValueAct estimates that Disney's theme parks and consumer products businesses generate $10 billion in EBIT, which is worth approximately $80 per share, based on their cost basis in the stock.

Disney's theme parks unit generates a high return on investment, enabling the company to profit from its intellectual property. Unlike its competitors such as Warner Bros, Paramount, and Netflix, Disney has this unique advantage. Additionally, this business is not threatened by technology but rather benefits from it.

Disney's Genie app, which helps park visitors navigate the parks and minimize wait times, improves the visitor experience. Additionally, Disney has announced a $60 billion investment in theme parks, which will be a wise use of funds.

The theme park valuation implies that Disney's other businesses, including ESPN, theatrical movie releases, Disney+, Hulu, and its television networks, are valued at almost zero. The disruption of video streaming by the internet and the low cost of capital from 2016 to 2021 allowed streaming companies to acquire customers at any cost. However, with the rise of interest rates and inflation in 2022, the bubble burst, and there was a massive re-rating of assets globally.

High-growth companies that previously had easy access to capital are now experiencing capital constraints, providing an advantage to companies like Disney, which has a market-leading brand, an incumbent business model, and strong customer relations.

The focus of companies is now on profitability rather than acquiring customers at any cost during the ongoing streaming wars. As a result, they are cutting costs and creating sustainable revenue.

ValueAct has expertise in both sales and revenue growth. At Salesforce, where ValueAct CIO Mason Morfit is on the board, margins have increased from 18% to 32% and the stock price has risen from $130 to $220 in just 10 months. Disney has already announced a cost-cutting plan, but it is the revenue opportunity that is particularly intriguing.

ValueAct has helped portfolio companies such as Adobe, Microsoft, Salesforce, Spotify, and the New York Times create bundles, pricing tiers, and advertising stacks that have resulted in less churn, more pricing power, higher average revenue per user, and improved advertising technology.

Both the New York Times and Spotify have increased their bundles and subscription pricing. The New York Times has bundled Wordle, the Athletic, and other products, while Spotify has bundled podcasting and audiobooks. The New York Times' stock price has increased from $30 per share to $45 per share, while Spotify's stock price has increased from approximately $80 per share to $175 per share. Disney has numerous opportunities for bundling, price tiers, and other strategies, and intelligently bundling its products will lead to more stable and valuable revenue. Based on similar situations that ValueAct has been involved in, this could lead to up to $15 billion of EBIT for the media assets and a Disney stock price as high as $190 per share.

Through board seats and active shareholding, ValueAct has a history of creating value, as seen in its contributions to Salesforce, Microsoft, Spotify, and the New York Times.

The Disney board should welcome them with open arms as they have a reputation for working amicably and constructively with boards, and their extensive experience at technology companies and media companies, as well as their innovative and relevant history of growing sustainable revenue at similar companies, make them a valuable addition to the board.

Disney appointed Bob Iger as CEO in 2022 with a two-year contract aimed at turning the company around. The board established a succession planning committee at the time. Iger later extended his contract through 2026, but long-term succession remains a top priority for the board. Having a shareholder representative on the board, such as ValueAct's CIO, who has experience in CEO succession, would be beneficial in navigating the process at Disney.

The Disney board is now faced with an unexpected alternative due to the confrontational proxy fight by Nelson Peltz and Trian Partners.

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.