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Morningstar | Comcast Gives Disney Control of Hulu for a Piece of the Upside; Firms Focused on Their DTC Efforts

Disney and Comcast have agreed on a unique and complex deal that immediately hands over operational control of Hulu to Disney while providing Comcast the ability to monetize some of the upside in Hulu. The deal will help Disney reach its goals for Hulu, which it views as the third leg in its direct-to-consumer efforts along with Disney+ and ESPN+. On the other side, Comcast can now fully focus on its NBCUniversal streaming service, which will launch in mid-2020. We are maintaining our wide moat ratings for both firms and our fair value estimates of $130 and $45 for Disney and Comcast, respectively.

Under the deal, Comcast gains a put option and Disney a call option on Comcast’s 33% stake in Hulu. The options can be exercised as soon as January 2024, with the value of the total Hulu equity set to at least $27.5 billion. Recall that AT&T recently sold its 10% stake in the streaming service back to the firm at a total valuation of $15 billion, which implies roughly 13% annual compounded growth for Hulu’s valuation over the next five years. The firms can also ask for an independent valuation of Hulu when the option is exercised, which could result in a higher valuation. Comcast also has the option to fund or not fund any future capital calls, which will be capped to $1.5 billion in equity funding with any additional capital required funded by non-diluting debt. Comcast’s equity stake can not be diluted below 21% of Hulu, meaning that Comcast will receive at least $5.8 billion for its ownership stake.

Comcast also agreed to extend its NBCU content licensing agreement and Hulu Live carriage agreement for NBCU channels until late 2024, though oddly NBCU can also end most of these arrangements in three years. Comcast also gained the right to add programming that it has licensed exclusive to Hulu to its own streaming service a year from now, but Hulu would then pay a reduced license fee. The cable giant will also have the right to distribute Hulu on the X1 platform.

The deal appears to be a win-win for both sides as the firms can now focus on their respective DTC efforts and on integrating their recent acquisitions (Fox entertainment assets for Disney and Sky for Comcast). For Disney, the operational control of Hulu provides the firm with the ability to bundle its DTC platforms without consulting or relying on a third party that will become a direct competitor. We would expect aggressively priced offerings from Disney, particularly around the launch and first year of Disney+. The company already came out swinging with a $7 price point for Disney+ and was likely behind the January price drop of the ad-supported version of Hulu to $6. We Believe that one possibility is a bundle of Disney+ and ad-supported Hulu priced between $10 to $12, below the $13 standard plan at Netflix. Beyond pricing, Disney will also be able to share information between the platforms on users, viewing habits, ad impressions, and other data. For Hulu specifically, operational control will also help Disney to expand the service internationally as the firm regains control of its own content that is currently licensed to other services.

Comcast is still trying to walk a fine line as it adapts to shifting consumer habits. The firm has signaled its desire to maintain the status quo, saying on several occasions that it will place content wherever the economic returns are highest, whether a platform like Netflix or its own. In addition, Comcast’s planned ad-supported DTC offering will be available to existing traditional television customers at no charge. This strategy increases the value of the traditional television bundle, slowing cord cutting, while also driving adoption of NBCU’s DTC product to position the firm to retain viewers as they drop traditional television services. Keeping a toe in Hulu for now provides Comcast with another strategic option to retain NBCU viewers. If Hulu proves successful, NBCU content will be part of that success, potentially preventing Disney from exercising its call option, leaving Comcast with a healthy licensing revenue stream and a valuable economic stake. If Hulu struggles, Comcast can exercise its put option and recover at least some value, while maintaining its ability to move NBCU content to its own DTC platform.