Comcast Eyes the Eisner Discount

Errors in Judgment

Ten years ago, the Disney franchise was flat-out impressive, generating a net profit margin of more than 11%, returns on shareholder equity above 20% and total capital in excess of 15%. These same metrics have been mired at less than half of these levels for several years.

With no real increase in earnings after a four-fold jump in debt, coincident with a four-fold increase in total capital, the "stubborn numbers" at Disney are hard to fathom. Capital-allocation mistakes have been made -- huge, multibillion-dollar mistakes.

The downward trajectory in capital allocation started nine years ago, after Eisner's successful debut at the helm of Disney. Beginning with the $18.9 billion acquisition of Capital Cities/ABC, negotiated in 1995 and completed in early 1996, it has been one capital-allocation mistake after another, from the ill-conceived Go.com to the acquisition of Fox Family, among others. Eisner even allocated shareholder capital to two sports franchises --- hardly the stuff of a careful capital allocator.

Disney shareholders who are preparing to vote in the upcoming board election should ask themselves this question: Why has Comcast (CMCSA Quote) made a takeover offer for Disney stock? The answer is simple: Comcast thinks Disney's asset value is higher than its stock value.

And why is the stock selling at a discount to the asset value? Again, I think the answer is simple: Call it the "Eisner discount." While Eisner frets every year about ABC's upcoming fall lineup (eight years later, this last-place network is still in turnaround mode), the core Disney business languishes. Universal and other competitors have caught up to Disney's theme parks. Saucy characters like Nickelodeon's Rugrats have made Donald Duck and Mickey what's-his-name less than relevant to the current generation of kids. Of course, there have also been several years of poorly allocated shareholder capital. An Eisner discount is more than justified.