can't catch a break.
Even Monday night's news that the world's most-loved (and hated) entertainment company may substantially expand its commitment to the Internet couldn't get Disney's shares moving Tuesday. In afternoon trading, Disney was down 1 7/16, or 5%, at 29 7/16, continuing a yearlong slump, on volume of 4 million shares, which is about average.
The tepid investor response came after the Mouse revealed in a
Securities and Exchange Commission
filing that it's in talks to buy the 57% of
that it doesn't already own. Infoseek and Disney already work closely, with Infoseek hosting Disney's
, a linked network of sites that includes
and the original
, one of the Web's biggest portals and most frequently visited sites.
Buying Infoseek would make Disney the first old media company to own all of a major portal, putting it well ahead of its three biggest competitors,
, none of which have yet established an important Web presence.
But Disney has so far gotten little respect for its Net efforts. Like
Barnes & Noble
and other bricks-and-mortar companies that have made a major effort to push onto the Internet, Disney hasn't been able to convince investors that it can meld its old businesses with the new paradigms (whatever that means) required to be successful on the Internet.
The lukewarm reception among investors isn't surprising considering that Disney's move had been rumored for some time, says
analyst Jessica Reif, who has a neutral rating on the stock. (Merrill hasn't done any recent underwriting for Disney.) In addition, Disney's announcement was notably light on details. Disney and Infoseek "have not reached any final determination as to whether to proceed with any transaction, or with respect to its structure and terms," according to the filing.
"It's too early to lay out a capital structure -- there's a variety of structures that make sense," says
analyst Chris Dixon. "What's more important here is to recognize that Disney is moving to gain control of what has been a somewhat problematic subsidiary." (PaineWebber rates Disney attractive; the bank hasn't done any recent underwriting for the company.)
The Mouse did say that it might buy Infoseek with a new tracking stock, which would provide investors a way to value Disney's Internet businesses -- and Infoseek -- apart from Disney's other assets. Buying Infoseek with a Disney Internet tracking stock would be a way for Disney to avoid having to issue lots of new shares and "dilute" current investors in Disney's parent company. Put another way, Disney would lower its per-share earnings and revenue by issuing its own stock for Infoseek shares. Using a tracking stock gets around that problem. That's because while Disney trades at standard multiples for a big media company -- about three times revenues -- a Disney Net stock would presumably garner the obscene price-to-revenue multiples that investors lavish on other Internet stocks.
Estimates of the value of Disney's Internet businesses vary. In a note Tuesday,
Salomon Smith Barney
analyst Jill Krutick estimated that Disney's online assets could generate as much as $150 million in revenue in 1999. (Salomon Smith Barney hasn't performed any recent underwriting for Disney.) Compared to standalone Internet companies, that's similar to
but well behind industry leader
. At 30 to 40 times revenues, a standard multiple for Internet companies, Disney's online business would be valued at roughly $6 billion. Infoseek, which rose almost 15% in trading Tuesday morning to 50, accounts for roughly half of that value.
and other Disney sites make up the rest. An estimate from
, which has been wrongly bullish on Disney throughout 1999, is more optimistic, valuing the Mouse's Net assets at upwards of $7 billion. (J.P. Morgan has no underwriting relationship with Disney.)
Even for Disney, which has a total market valuation of roughly $62 billion, that's real money. But investors and analysts are apparently unwilling to overlook the structural problems that will drive Disney's earnings down more than 20% in fiscal 1999. As a five-part
series noted in April, there is growing evidence that American children are maturing more quickly than they have at any time since World War II, a change that profoundly affects Disney's core business. ABC, which Disney bought for almost $20 billion in 1995, is also lagging, and the prolonged and very ugly court fight between Disney Chairman Michael Eisner and his onetime protege Jeffrey Katzenberg has also left analysts wondering whether Eisner has lost the focus on shareholder value that once set Disney apart from other entertainment giants.
Finally, Disney's top Internet executive, Jake Winebaum, said Monday that he would leave the Mouse to found
, a venture capital firm that will specialize in funding Internet start-ups. Disney will invest in eCompanies, but Reif says that Weinbaum's departure is a major loss for the Mouse.
"It is very disappointing that Jake Winebaum is leaving," Reif says.
Not everyone agrees. Dixon at PaineWebber says Winebaum is stronger as an entrepreneur than as a manager and that his departure may give Disney the chance to improve Go.
"I look at the Go network rollout, and I think there have been really difficult execution issues," he says, noting that the service isn't as easy to use as competitors like Yahoo!.
Still, Disney has lost dozens of executives to Internet start-ups in the past three years, including Meg Whitman, now
chief executive officer; Gerry Laybourne, founder of
; and Ted Philip, Lycos' chief operating officer. The departures have hit both Disney's Internet operations and its vaunted strategic-planning division.
So it may take more than a little Internet pixie dust to get the shine back on Disney stock.
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