Sunday, April 19, 2020

Disney Part 1: Survival

Disney is a great company I'd love to buy, but let's see if they can survive first.    They have been hit hard by the coronavirus, shutting down theme parks, hotels, movie studios, and sports.  The company has high fixed costs.  How long can they last without a capital injection?

Balance Sheet

At Dec 2019 (p13), they have:
  • 8bn cash, 18bn current receivables and 20bn current payables.  So net 6bn, assuming they can collect all their receivables.
  • 10bn in current borrowings.
  • 5bn in deferred revenue and other current liabilities.
So we are at -9bn.

They have 12.8bn in unused commercial paper (p103, plus this, and subtracting 1.2bn on p14).
Since December, they have issued another 7bn new notes (1) (2).
So they have 10-11bn headroom.  Again, assuming they collect all their receivables.

Cash Burn

I try to estimate their cash burn during the coronavirus period from their segment operations (pp37-44).  For most numbers below, I am using the full year (ending Sep 2019) results:

  • Media networks.  This is mostly cable (which is mostly ESPN), and some broadcast free-to-air (like ABC's Sesame Street).  Assume Broadcast revenue remains.  But Cable revenue gets halved (ESPN has no live sports - assume half the subscribers up for renewal cut subscription).  Get a cash burn of 0.5bn per year.
  • Parks, Experiences and Products (merchandise).  Assume merchandise revenue is cut from 4,5bn to 1bn (eg: Spider Man toys and Frozen crap).  Everything else for parks & resorts is zero.  On the cost side: Reduce operating expenses from 14bn to 6bn (staff reduced from 6.2bn to 4bn), and SG&A from 3 to 1bn.  Ignore D&A as non-cash.  So they burn 6bn cash a year.
  • Studio Entertainment.  This is movies in theatres, plus distribution for home entertainment (DVDs, pay-per-view and licensing for cable/free-to-air, excludes OTT).  Assume no Theatre distribution revenue, but unchanged revenue from Home Entertainment and TV/SVOD.  On the cost side, ignore 3.7bn of the operating expenses which is amortisation, and reduce SG&A to 2.5bn.  Gives a profit of 2.5bn.
  • Direct-to-Consumer.  These are streaming subscription services: ESPN+, Hulu and Disney+.  I'll use the Dec 2019 results for this, because of Disney+'s rollout.  They have a 700m loss per quarter, annualise it to 2bn a year.   (The actual cash burn may be higher, due to their film amortisation, but there is no segmented cashflow.  Thats a problem for another day.  Just use -2bn for now.)
So we get a cash burn of 6bn a year.

Conclusion

With luck, they can last 12 to 18 months.  The main thing is the 18bn current receivables.

I guess if they run out of money they can always print some.

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