Disney Still ‘Best Opportunity’ In Media Amid Desantis Duel

Despite Walt Disney Co.’s bitter feud with Florida Governor Ron DeSantis and its expected layoffs plans, the company’s stock is being called the “best opportunity in media” by Wells Fargo’s Steven Cahall.

Walt Disney has the chance to improve its streaming-margin outlook through both pricing and cost-efficiency moves, Cahall said in a note to clients. The company is “under-earning” in various parts of the business aside from parks, he added.

“Disney+ will increasingly be about pricing vs volume in our view, with the most recent price increase seeming to deliver high efficacy despite a significant increase in the U.S. from $7.99/[month] to $10.99/[month],” Cahall wrote. The company may ultimately conduct a crackdown on account sharing, similar to what Netflix is doing now, which “is effectively a price increase,” he said. 

Cahall’s call on Disney’s stock comes as the company's spat with Governor DeSantis escalates, who is expected to become a top Republican contender in the 2024 presidential race.

"Special District" Corruption

In the latest development, the company, which is among Florida’s largest employers, sued DeSantis on April 26, alleging the Republican has waged a “relentless campaign to weaponize government power” against the company amid a protracted fight over a controversial classroom bill. The federal lawsuit alleges that DeSantis “orchestrated at every step” a campaign to punish Disney that now threatens the company’s business.

The fight started last year after Disney came out against a Florida bill limiting classroom discussion of sexual orientation or gender identity, dubbed “Don’t Say Gay” by critics. The governor and his allies targeted the Reedy Creek Improvement District, which has allowed Disney to essentially self-govern its Florida operations since the 1960s.

In April 2022, the Florida Legislature passed a law abolishing the RCID and other special districts formed before November 5, 1968.

The special district was established in 1967 by Disney and the state as a way for the company to raise its own revenues to pay for municipal infrastructure expenses at Disney World and EPCOT. Reedy Creek, now called the Central Florida Tourism Oversight District (CFTOD), issues bonds on properties within its boundaries effectively on behalf of Disney.

The dissolution act has replaced the RCID board's five Disney-selected members with five members appointed by the governor. In their final days of controlling the Reedy Creek improvement district’s board, Disney executives and attorneys found a way to poison the authority of the incoming members appointed by the Governor and effectively oversee the area’s development.

Responding to the dissolution act, the Reedy Creek board signed a development agreement with Disney that allowed maximum developmental power over its territory for the next 30 years.

Other property owners will need Disney’s permission to expand within the district, and they and Reedy Creek leaders will need to seek Disney’s approval if they made any aesthetic changes to their properties within the district.

The CFTOD has spared no expense in maintaining Disney’s power over the area, going so far as to add a section that places restrictions on the district until 21 years after the death of the last surviving descendant of King Charles, or until Disney abandons the resort.

But regulatory hurdles haven’t hurt the company’s share price. Wells Fargo’s Cahall raised his prior target on Disney shares to $147 from $141. The new target is 48% above current levels, with Disney’s stock recently changing hands near $99.

Disney’s share price is up 15% year-to-date compared with the 11% gain for Netflix Inc. Disney closed at $102.5 a share on April 28.

Taxes and Liabilities

Because Reedy Creek financed its infrastructure costs by issuing bonds against Disney properties and revenues, the state of Florida may be on the hook for any outstanding bond liabilities.

Under Florida law, when a special district government is dissolved, the dissolution transfers "title to all property owned by the preexisting special district government to the local general-purpose government, which shall also assume all indebtedness of the preexisting special district,” leaving the government potentially on the hook for over one billion dollars.

In response to the law's passage, the ratings agency Fitch placed the Reedy Creek Improvement District's financial obligations on negative watch. A Fitch executive said in a statement that it remained unclear how the debt would be treated if Reedy Creek were dissolved but that it would affect Disney.

"Dissolution of the district would eliminate access to tax-exempt issuance," said Michael Rinaldi, Fitch’s head of U.S. local government ratings, adding that "it could cost Disney and other landowners within the district more to finance various projects.”

“Fitch expects the title of all property owned by RCID, including its indebtedness, to be transferred to Orange County (and to a lesser extent, Osceola County) or to a successor agency, as prescribed under Florida law. Fitch believes the mechanics of implementation will be complicated, increasing the probability of negative rating action,” the agency said in a statement after the notice.

Layoffs

The company is also going through with its plans to reduce its workforce. Disney laid off several thousand workers across the company in April in the second and largest wave of cuts as part of the media giant’s previously announced plan to slash its workforce by 7,000 employees. The redundancies announced in February amount to about 3% of the 220,000-person workforce the company employed as of 1 October.

The latest round of job cuts will impact ESPN, Disney’s entertainment division, Disney Parks, and its Experiences and Product division as part of a larger workforce reduction plan announced in February by chief executive Bob Iger in an aim to save $5.5 billion in costs, the company said.

"The difficult reality of many colleagues and friends leaving Disney is not something we take lightly," Disney officials said.

The company had suspended its dividend payments during the pandemic, but Iger announced in February that he expects them to return.