Disney Dazzles Wall Street

The first quarter is impressive, and a big radio deal comes through.
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Updated from 4:40 p.m. EST

Disney

(DIS) - Get Report

beat first-quarter earnings targets and confirmed it's selling its radio assets in a $2.7 billion deal.

For the first quarter ended Dec. 31, the Burbank, Calif., media giant made $734 million, or 37 cents a share, up from $686 million, or 33 cents a share, a year earlier. Revenue rose 2% from a year ago to $8.85 billion.

Latest-quarter results benefited from a 2-cent-a-share gain related to the sales of a cable television equity investment and of a magazine business. Excluding one-time items, latest-quarter earnings rose to 35 cents a share from 34 cents a year earlier. Analysts surveyed by Thomson First Call were looking for a 30-cent profit on sales of $8.79 billion.

The company generated $376 million in free cash flow during the quarter, reversing a deficit of $191 million in the prior-year quarter. The change in free cash flow for the quarter reflected an increase of $423 million in cash provided by operations and a decrease of $144 million in capital expenditures.

The increase in cash provided by operations was primarily due to the timing of collections of advertising receivables at Media Networks, lower net investment in films, and higher cash distributions from equity investees. These increases were partially offset by the timing of payments for accounts payable and accrued expenses.

During the first quarter, Disney repurchased 49 million shares for $1.2 billion. On Jan. 23, Disney's board expanded the buyback plan to 400 million shares.

"I am encouraged by the solid momentum in our earnings and the financial and creative strengths that underpin these results," said CEO Robert Iger. "We continue to focus on our strategy of creating the finest content, embracing leading edge technologies, and strengthening our global presence and in doing so, we are confident in our ability to deliver long-term success across each of our businesses.

"Our recently announced plan to acquire Pixar advances our efforts against each aspect of that strategy," Iger said. "In addition, today's announcement of our proposed combination of the ABC Radio business with

Citadel Broadcasting

(CDL) - Get Report

underscores our commitment to maximizing the value of our assets for our shareholders, while focusing our capital and management resources toward our core businesses."

The radio deal will combine Disney's ABC Radio, which includes 22 radio stations and the ABC Radio Networks, with Citadel Broadcasting. The newly combined company, to be named Citadel Communications, will be the third-largest radio group in the United States, with a strong national footprint reaching more than 50 markets.

TheStreet.com

reported Friday a deal was imminent.

Disney shareholders will own 52% of Citadel Communications and Disney will retain $1.4 billion to $1.65 billion in cash, depending on the market price of Citadel Broadcasting at the time of closing. Citadel shareholders will own the remaining 48% of the combined company. Valued at $2.7 billion, the deal is expected to be completed by the end of the year, subject to regulatory approvals.

Farid Suleman, Citadel's chief, will be CEO and lead the management team of the new company. Suleman, a seasoned industry leader with both radio station and radio network experience, is the former CEO of Infinity Broadcasting, the companies said.

As part of the transaction, 14 FM and 8 AM ABC radio stations in nine major markets, including New York, Los Angeles, Chicago, San Francisco and Dallas, will join Citadel Communications.

In addition, the merger includes the ABC Radio Networks, which create and distribute programming to more than 4,000 affiliates. The programming includes popular syndicated radio programs such as "Paul Harvey News and Comment," "The Sean Hannity Show" and "The Tom Joyner Morning Show," as well as 24/7 music formats.

The assets joining the new company had 2005 revenue of $575 million and operating income of $200 million.

Iger has spent the new year wheeling and dealing. Two weeks ago, the company pulled the trigger on a $7.4 billion acquisition of animation powerhouse

Pixar

(PIXR)

, bolstering its movie studio and infusing fresh creative talent, notably

Apple

(AAPL) - Get Report

chief Steve Jobs.

Iger, who took over last fall after Michael Eisner's long-awaited departure, has been credited with transforming Disney. He has trimmed Eisner's famously Byzantine internal management structure and put together savvy deals to get ABC and ESPN content on new platforms like the iPod.

How much fruit those arrangements will yield down the road remains to be seen. But it is widely accepted that the Apple deal helped soften Jobs to the Pixar deal, which in turn should help Disney by adding Jobs' famous entertainment-industry vision to Disney's often lackluster board.

During the company's earnings call, Iger said he wanted Disney to remain at the forefront of emerging technologies, and he touted the company's arrangement with Apple where the iPod was concerned. Iger said the deal has produced 2.5 million downloads to date, and he added that "the real benefits will be realized in the future when handheld wireless devices are more widely adapted." He also said the iPod and other platforms have the potential to create a major additive revenue stream for Disney's content down the line.

Success has not been easily won when it comes to the company's share price, however. Since Iger took over last fall, Disney shares have risen 5%, while the big-cap

S&P 500

is up 7%.

Arthur Pergament of New York-based Pergament Advisors, whose firm has no position in the stock, says that softness in the entertainment division results reflect a weak release schedule but says the "pipeline is starting to improve."

Pergament says Disney has been focused on profits, cost-cutting and combining businesses, and adds that "we're going to look at the company, because we feel it's an undervalued franchise."

Asked about the ABC Radio deal, Pergament noted that "old-line media needs to achieve economies of scale." When asked about whether we were likely to see more transactions out of Disney, Pergament said he thought that every aspect of the company was being looked at to evaluate the overall asset mix.

In an interview just before the radio announcement was made public, Jack Liebau Jr., president of Disney shareholder Liebau Asset Management, said, "We view the potential radio spin-off as another shareholder friendly action by Bob Iger."

Asked about the stock's performance since Iger formally took the helm some four months ago, Liebau said, "We view the stock as attractive."

Regarding ABC television, Iger said the network is currently enjoying "great upscale demographics," such as being No. 1 in households with income above $75,000 a year, a key group for sponsors.

Iger added that the company feels great about its position heading into the annual advertising commitment process. He also said ABC continues to give Disney the reach necessary to invest in great content, use it with new technology platforms, such as the iPod, and aggressively take advantage of its brands outside the U.S.

On the home-video front, a market that has seen growth slow recently, Iger said he was "bullish about next-generation DVD," which he believes will be "good for our business, great for consumers and something that is going to ignite the marketplace."

Late Monday, Disney shares rose 54 cents to $25.50.