Disney will start process to spin-off ESPN, ABC in 2023: Wells Fargo

Wells Fargo is predicting big things for Disney's (DIS) sports network ESPN in 2023.

In a new note published on Tuesday, Wells Fargo analyst Steve Cahall outlined the firm's top predictions for the media business in 2023, and made a big call about the future of ESPN under Bob Iger's leadership at Disney.

"DIS will begin the spin-off process for ESPN & ABC including launching ESPN in streaming a la carte," Cahall wrote. "Cost rationalization and balance sheet options are critical to reaching this outcome. The result is a better-off remaining DIS."

Whether or not Disney should consider spinning off the popular sports network has been a perpetual talking point at among investors for years, and picked up steam this year after Third Point's Dan Loeb sent a letter to the company urging an ESPN spin-off.

Loeb argued ESPN would have greater flexibility to pursue business initiatives, such as sports betting, if it was not part of Disney.

Newly-returned Disney chief Bob Iger will likely have to decide ESPN's fate before the end of his two-year term in 2026, though former CEO Bob Chapek previously shot down the notion of selling the sports network.

"If you happen to have a vision for the future that the rest of the world’s not necessarily in tune with yet, then you keep ESPN. You keep ESPN, and you have a full complement of general entertainment, family news, sports that no other entertainment company can touch," Chapek told Deadline, adding the company received numerous inquiries from businesses looking to purchase.

Analysts have remained split on what Disney should ultimately do with ESPN.

Jason Bazinet, managing director at Citi, previously told Yahoo Finance Live: "We're very much against spinning off ESPN… that's the dumbest thing ever."

Bazinet went on to explain ESPN has the potential to be a much bigger global business, especially if Disney chooses to leverage the internet for distribution. He also noted the network generates the bulk of Disney's cash flow, which will ultimately fund its pivot to direct-to-consumer and help offset accelerating streaming losses.

"What Disney is embarking upon with a direct-to-consumer business is very much like a cable company or a telecom company," Bazinet said, stressing that DTC bridges the gap between the consumer and sports rights. "They should not spin it off."

Still, investors are eager to see some type of change at the company amid steep streaming losses and a sinking stock price. On Monday, Disney shares closed at their lowest level since March 2020 after disappointing box office figures for "Avatar: The Way of Water."

In its most recent fiscal year, Disney's operating income for its Linear Networks segment — which includes ESPN — totaled $8.52 billion. Losses for its direct-to-consumer unit, which includes Disney+, Hulu, and ESPN+, totaled $4 billion for the year.

'Everything's on the table'

Tuesday's predictions come as industry watchers expect more media merger activity in 2023.

"It's a pretty good inflection point," Jon Christian, EVP of digital media supply chain at Qvest, the largest media & entertainment-focused consulting company, told Yahoo Finance. "The game has changed. It used to be just subscribers at all cost…but now [investors] need these services to be profitable."

Bart Spiegel, partner of global entertainment & media deals at PwC, added: "We're entering a chapter two of the streaming wars."

"Only time will tell, but I think everything's on the table to try to improve profitability and make the platforms more creative to their overall business," Spiegel continued.

"Our 2023 predictions indicate Media and Cable sectors reacting to generally harder times, both cyclical and structural. Tough times mean tough decisions," Wells Fargo's Cahall noted.

Even for the Worldwide Leader in Sports.

Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at [email protected]

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