$Disney (DIS.US)$ is amid a restructuring exercise as it faces fundamental challenges and there are rumors adrift that the company might offload its ESPN cable sports channel.
An analyst at KeyBanc Capital Markets weighed in on the value ESPN has for Disney.
Muted Expectations: ESPN is a "melting iceberg," said KeyBanc Capital Markets analyst Brandon Nispel. Its valuation could be currently at $30 billion, assuming nine times the valuation multiple of the estimated EBITDA estimate for 2024. The fair value range is at $28 billion to $36 billion, he said.
The analyst estimates ESPN's revenue to be $16 billion, and expects it to have a low-single-digit revenue growth profile. Much of the growth will likely come from the direct-to-consumer business as linear revenues are tracing a downward trajectory, he said.
Assuming $10.1 billion in programming and production costs for ESPN in fiscal year 2023, ESPN's operating income margins will likely be in the low 20%, he added.
"We view the value of ESPN as likely below the consensus, which is just one of the five reasons we are cautious on DIS," the analyst said.
ESPN's fundamental outlook is negative and could materially worsen if $Charter Communications (CHTR.US)$distribution agreement isn't renewed, Nispel said.
"The opportunity for ESPN in streaming means price increases are coming, which will challenge scale," he added.
Patience Is Virtue: KeyBanc said it is unlikely that $Apple (AAPL.US)$ will buy ESPN. "While some believe ESPN could be worth $50B and AAPL is likely an acquirer, we don't believe it is likely AAPL will acquire the business when valuations may be coming down in the future," it said.
Patience, according to Nispel, is the best transaction strategy, given ESPN is a renter of content and rents continue to increase more quickly than Disney.
2 Near-Term Events: The analyst sees Disney re-segmenting and breaking out ESPN from Disney entertainment and the company's Investor Summit focused on Disney Parks, Experiences and Products as two notable events for Disney in the near term.
"We view neither event as a positive catalyst for shares," he said.
KeyBanc has a Sector Weight rating for Disney shares.
