Don't Spoil Disney's Ride


By Ronald Grover It didn't take long for the Walt Disney's (DIS) latest dustup with dissident former directors Stanley Gold and Roy Disney to come up at the company's May 11 earnings call. The first question lobbed at Disney's president, Robert Iger: Was the lawsuit filed 48 hours earlier by the two former directors "noise" -- that is, nuisance litigation?

After all, the company had just reported an impressive 29.9% hike in second-quarter earnings, to $698 million, on $7.8 billion in revenues. At 33 cents per share, the numbers beat the 32 cents expected by analysts and was 27% ahead of a year earlier.

"PLAIN FED UP." Iger, selected by the board on Mar. 13 to succeed retiring CEO Michael Eisner in October, was ready for the question: "I will not allow myself to be deterred or distracted" by the lawsuit or anything else, he declared.

In their suit, Gold and Disney seek to have Iger's elevation overturned, in part because the Disney board failed to conduct a fair and open search for a successor, the duo allege. Iger said yesterday that he has noted the mood of Disney staffers, who would just as soon have peace break out. "They are plain fed up and want the rhetoric to end so that they go back to doing what they do best, which is to create world-class entertainment."

He has a point. Instead of making Iger get out of the way, perhaps Gold and Disney should withdraw their suit. The two pulled off one of Corporate America's most impressive revolts a year back, helping to whip up shareholder discontent that drove the entrenched Michael Eisner from his CEO spot after a 45% negative vote at the company's annual meeting. They had an impact as conscientious shareholders.

AFTER THE DELUGE. Now, the Walt Disney Company seems on its way to better health, and the last thing shareholders need is a distraction of the sort that could eventually have the company and its onetime directors publicly arguing for weeks in a Delaware State court.

The studio is churning out hits, with the film unit's revenues up by 65% over 2004 on the basis of such films as The Incredibles and The Pacifier, a comedy starring Vin Diesel, according to Disney earnings released on May 11.

Theme park revenues also have risen year over year, by 3%, to $193 million, on the strength of a 20% hike in foreign visitors to both Disney World and Disneyland, offsetting the impact California rain had on local traffic to Disneyland.

HOT SHOWS. Perhaps most important, ABC will likely turn profitable this year for the first time in five years, predicted Iger and Disney CFO Thomas Staggs. Indeed, the network that brought American households Desperate Housewives and Gray's Anatomy is expected to be the big winner when the networks start selling new season ads in September.

Bear Stearns analyst Raymond Katz figures ABC will see ad sales increase by 21.8%, to $1.92 billion, well ahead of the industry average of 2.3% and twice the increase from the $2.7 billion that industry leader CBS (VIA) is expected to generate. (On the heels of a 14% fall in ratings, NBC (GE) is expected to collect $2.33 billion, Katz figures, down by 14.9%).

Not that everything is coming up green in the Magic Kingdom. At $26.67 as of the closing bell on May 11, the share price remains depressed, down 11% from its 52-week high. Some of that has to do with Disney's lingering standoff with Steve Jobs' Pixar Animation Studio (PIXR).

PEACE WITH PIXAR? But Jobs, who disliked Eisner, is now talking warmly about Iger and has said he has had a few informal meetings with Eisner's successor. The odds are improving daily that Pixar may renew its relationship with Disney, which distributed Pixar hits The Incredibles and Finding Nemo.

The existing agreement calls for Disney to pay for half Pixar film's production costs on each movie, receiving 62% of the profits, including a distribution fee. Jobs wants Pixar to pay for the film productions and give Disney 8% of the profits to distribute. Iger and Disney may well settle for a less attractive deal in the end if the thaw continues.

So what do Gold and Disney hope to accomplish? In their lawsuit, they want the board election to be held again, and they seek the ability to offer their own alternative slate.

They say that they contemplated their own slate in February, at the Disney annual meeting in Minneapolis, but changed their minds because they thought the board would conduct a full search for a CEO. (In fact, the Disney search was no thing of beauty -- only one outside candidate, eBay (EBAY) CEO Meg Whitman, drew consideration, and she backed out when the board dawdled.)

GROWTH, BEAUTIFUL GROWTH. But give Iger credit: He has hit the ground running. He has streamlining the company, eliminating the strategic planning unit that insiders groused was holding back the launch of promising new initiatives. He has cut loose Miramax founders Harvey and Bob Weinstein, whose bickering had diverted executive time and energy. And he signed the long-awaited NFL deal, giving money-making ESPN the rights to televising football games on Monday nights, ending the long-running but unprofitable Monday Night Football format on ABC.

Disney CFO Thomas Staggs predicts that Disney will continue to show double-digit earnings growth until at least 2007. That's what any shareholder wants from his or her company: continued, sustained growth, especially for a company with more than $30 billion a year in revenues. As major shareholders, Disney and Gold clearly understand that. A nasty lawsuit right now is the last thing a Disney shareholder should want. Grover is Los Angeles bureau chief for BusinessWeek


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