Bail Out Mickey Mouse: Is Disney Too Big To Fail?

The COVID-19 pandemic has been brutal in its economic effects on America's entertainment industry. Theaters were closed for nearly five months and then reopened, only to close again. Many feature films, such as the latest James Bond installment No Time to Die and the Denis Villeneuve's Dune remake, were delayed opening well into 2021 due to poor attendance and disappointing box office earnings of new releases such as Tenet.

The closing of these movie theaters and the delays of these feature films have caused a domino effect by altering America's content viewing habits, shifting much of those activities normally reserved for theater attendance towards content streaming services such as Netflix, Amazon Prime Video, Hulu, and HBO Max. 

The big-budget studios, such as Disney, which owns major intellectual property (IP) franchises such as Star Wars and Marvel, have taken baby steps by releasing direct-to-stream features for Disney Plus, such as Mulan and streaming-only TV series such as The Mandalorian. These have been moderate, but not significant successes when you compare them to major in-theater releases. Had this been Disney's only major challenge this year, it would be a temporary setback. But it's not.

Hey Mickey, that's a lot of debt

Disney is a vast company that has several large divisions. Its Studio Entertainment division produces film and television using its core IP, including Disney, Marvel, Star Wars, and Pixar characters. In addition to licensing these films to movie theaters, the Direct to Consumer division releases to on-demand services and its Disney Plus streaming service.

Disney also now owns FOX Entertainment, which it paid approximately $71B for in March of 2019. In addition to all of the 20th Century FOX films, that purchase included the IP and studio production behind animation like The Simpsons and Bob's Burgers, as well as rights to The X-Men, and a 30% stake in Hulu. Much of FOX was folded into its Media Networks unit, which holds its broadcast, cable, radio, and publishing assets, such as the ABC television network and ESPN.

Because of the large nature of the FOX purchase, the company took on considerable debt. According to Walt Disney's most recent balance sheet reported on August 4, 2020, total debt is $64.42 billion, with $54.20 billion in long-term debt and $10.22 billion in current debt. Adjusting for $23.11 billion in cash-equivalents, the company has a net debt of $41.31 billion.

In addition to this debt that Disney is financing, the company has been losing billions of dollars of revenue every quarter. During the pandemic, the theme parks' and resorts closures (such as Walt Disney World and Disneyland, as well as the company's cruise line), and reduced movie theater revenue, contributed to a $5B revenue shortfall in April, May, and June, with the parks contributing to about $2B of that total. 

The fourth-quarter numbers have not been released yet, but assuming the situation does not significantly improve for about a year, it's entirely possible that Disney could lose as much as $20B in revenue from Q3 of 2020 to Q3 of 2021. The company has recently let go of about 28,000 temporary and full-time staff to curb the hemorrhaging.

Mirror mirror, on the wall, do we let the entertainment industry fall?

Disney is one of the largest and most prestigious of American corporations. A faltering of this company would likely be catastrophic for the entire entertainment industry, one of the few industries in which the United States still maintains a global leadership role. 

However, suppose that theater box office revenues do not rebound to what they previously were -- with only 35 to 50% capacities at best, or potentially the theaters that are currently closed do not reopen in 2021. 

In that case, we could be looking at a long-term crash or the complete dismantling of the motion picture and entertainment industry as we have known it. A failure of the entertainment industry would also affect other sectors, such as retail shopping and restaurants. Many movie theaters are attached to shopping malls, which are also in grave danger due to the pandemic and overall economy.

Is Disney a company that is "too big to fail?" That phrase has been used to describe the banking industry and the domestic automotive industry during their respective bailouts in 2007-2008 with the Emergency Economic Stabilization Act and the $700B Troubled Asset Relief Program (TARP).

Will the tech and cable giants inherit the Magic Kingdom?

I don't know if we can genuinely consider Disney and companies with similar entertainment industry interests to be in the same category of essential services or critical to our national security, such as the banking or automotive industries. But they are huge employers and generate a great deal of revenue. Additionally, their reach and influence in other sectors such as retail and restaurants are considerable, so any failure of these companies could cause significant systemic issues within our economy.

Should the United States government consider a "bailout" similar to banking and automotive for companies like Disney? A large-scale debt restructuring? I can't say that for sure. I'm not even confident that it is currently feasible under the current economic and political conditions.

What I do think is more likely is that these companies could end up becoming devalued. Their assets could end up for sale to the only other companies with enough cash to buy them wholesale, or in large pieces, such as Apple and Amazon, and Netflix, and existing media/telecom/cable infrastructure giants such as ViacomCBS, AT&T, Comcast, and Charter Communications. 

The latter group has already made significant content investments with recent mergers and acquisitions, such as AT&T's 2018 $108B purchase of Time Warner, which begot WarnerMedia and HBO Max. But WarnerMedia has its own problems now and has begun its own round of layoffs (potentially in the thousands) and major cost-cutting measures.

Goofy idea: Mouse, meet Scrooge McCupertino

Certainly, with a nearly $200B war chest, a company like Apple has more than enough cash on hand to buy Disney's IP assets entirely. There's no question that Cupertino, who has projects in place like Foundation on Apple TV Plus, wants to boost its profile in the entertainment space and own content IP itself to compete with the media giants. 

But even if it was devalued, resulting in a lower-priced transaction for Apple, there's the issue of Disney's debt and all of the physical assets in terms of the parks and resorts that Apple will not want, especially if they continue to lose money for years or are deemed no longer financially viable. That's probably around one-third of the Disney company's valuation right there, anywhere between $50B and $100B depending on who is doing the math. 

In 2019, before the pandemic's height, the Parks, Experiences, and Products division accounted for approximately $26B of the company's $69.6B in revenue, by far its largest profit center -- it's now losing $2B per quarter. I could see Apple paying as much as $100B for just the studios, all the IP, and the streaming services -- but it would not want the parks on its balance sheet.

That's all fine and good, assuming somebody wants those park assets -- and I think it's questionable that anyone does in their current form. It's not like they have value without all the characters, rides, attractions, and the intellectual property from the films. You can't turn them into generic amusement parks. 

So if Apple (or another large media player with the cash to burn) doesn't want those parks, they'll have to license the use of the IP to someone that does in order to divest them. Complete divestment seems like a possibility for some foreign parks, such as those in China and Japan, and the cruise line, assuming the ships aren't stripped of their Mickeyness. But the cruise lines are in bad shape, too, as are vacation resorts.

Yes, the real estate itself has value, but not as much as if it were a profit center. Sure, you could demolish a ton of it and re-develop it -- Florida itself is a huge real estate and housing destination for people fleeing urban centers like New York and San Francisco -- but that would be a massive and expensive project in and of itself.

I don't have good answers for resolving these existential entertainment industry issues or making Disney a healthy company again. If you have any good ideas, Talk Back and Let Me Know.