Personal Finance
DIS

Disney Wants More Control Over Hulu

Hulu's logo built out of succulent plants

Disney (NYSE: DIS) is set to own a 60% share of Hulu once it closes its acquisition of 21st Century Fox (NASDAQ: FOX) (NASDAQ: FOXA) , but Disney will still have to deal with Hulu's co-owners, AT&T (NYSE: T) and Comcast (NASDAQ: CMCSA) .

Well, maybe just Comcast.

Disney is in talks with AT&T to acquire its 10% stake in the subscription video-on-demand service, according to a report from Variety . Gaining further control of Hulu could accelerate Disney's plans to increase its investments in content and geographic expansion. AT&T, meanwhile, could accelerate its debt repayment.

Hulu's logo built out of succulent plants

Image source: Hulu.

A key part of Disney's streaming portfolio

Disney's streaming strategy includes offering three separate services tailored to distinct audiences. ESPN+ is for sports fans, Disney+ is for family-friendly films and series, and Hulu carries more adult-oriented entertainment. That stands in contrast to AT&T's plan to offer a single three-tiered service featuring WarnerMedia content later this year.

Disney is already investing a lot of money in acquiring content for ESPN+ and creating originals for Disney+, but Disney plans to expand investment in Hulu, too. Hulu has started developing its own original content, some to much critical acclaim . Still, during Disney's fourth-quarter earnings call in November, CEO Bob Iger said, "... [W]e think there's an opportunity to increase investment in Hulu, notably on the programming side."

Disney also wants to expand both Hulu and Disney+ to Europe. Initially, it hoped to leverage Sky TV as a means of introducing its direct-to-consumer services to Europeans. Unfortunately for Disney, Comcast outbid Fox for the European pay-TV operator. It's not clear if Comcast shares the same ambition as Disney with regard to expanding Hulu into a territory where it's just invested in a competing video platform.

As a result, Disney may have to invest more cash in a European expansion for Hulu. An extra 10% stake in the company may give Disney the incentive needed to make the investment.

AT&T needs the cash

It's no secret that AT&T has a lot of debt. The company ended 2018 with $176.5 billion in debt. Its net debt to adjusted EBITDA ratio remains above 2.8. By the end of 2019, AT&T's management expects to pay down enough debt to reduce that ratio to 2.5.

Last summer, Disney pegged Hulu's value at $9.3 billion. That makes AT&T's 10% stake worth around $930 million, and maybe more based on Hulu's reported growth . AT&T could put that money straight toward debt repayment.

Importantly, AT&T doesn't have a lot to gain from its small stake in Hulu. It's going to move more of its WarnerMedia assets to its own streaming service as soon as it can, and it has already established itself in the direct-to-consumer and streaming video markets with DirecTV Now and HBO Now. The 10% stake in Hulu is likely more valuable in Disney's hands than in AT&T's.

What about Comcast?

Comcast is also planning to launch its own streaming service early next year, but it doesn't appear interested in relinquishing its 30% share of Hulu. "Disney would like to buy us out. I don't think anything's going to happen in the near term," NBCUniversal CEO Steve Burke told Variety in January.

Still, the company's efforts in building out its own streaming service will impact Hulu. Burke plans to reclaim shows like "Saturday Night Live" and "The Tonight Show" for Comcast's streaming service. NBCUniversal shows account for 17% of viewership on Hulu, according to Burke.

That said, Comcast's management remains open to licensing content to other streaming platforms where it makes sense. But if Comcast can grow its own streaming platform in popularity, it would become increasingly attractive for it to retain its best content for itself. If and when that happens, Comcast may be more interested in selling its stake in Hulu to Disney.

In the meantime, an extra 10% stake for Disney won't change much for Comcast. But it will give Disney a greater incentive to grow Hulu as part of its overall streaming strategy.

Find out why Walt Disneyis one of the 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

Tom and David just revealed their ten top stock picks for investors to buy right now. Walt Disney is on the list -- but there are nine others you may be overlooking.

Click here to get access to the full list!

*Stock Advisor returns as of March 1, 2019

Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

DIS CMCSA T

Other Topics

Stocks

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More