Disney wants sports leagues as ESPN partners

It’s clear to the four major U.S. professional sports leagues that Disney‘s ESPN is potentially interested in them taking an equity stake in the network.

What isn’t yet clear is why the leagues would do it.

The National Basketball Association and Major League Baseball have both questioned a partnership with ESPN if Disney’s goal is to mitigate or replace payments to leagues for sports broadcast rights with equity in ESPN, according to people familiar with the talks.

Disney executives and league officials agree that strategic partnership discussions are in the pure “idea” phase and may not amount to anything, said the people, who asked not to be named because the talks are private. Talks have had few specifics, said the people, but may heat up as ESPN attempts to reach a rights renewal deal with the NBA. Disney’s exclusive negotiating window with the NBA ends April 2024.

Disney is considering ways to save cash as it tries to shore up its balance sheet. The media giant’s streaming division continues to lose money — with $512 million lost in its most recent quarter — and the company would like to pay down its $44.5 billion in debt. Disney also likely owes at least $9.2 billion to Comcast for its minority stake in Hulu.

Agreeing to a deal where ESPN trades equity for sports rights could potentially save Disney billions of dollars that it can then use for other strategic ventures. ESPN struck a deal earlier this week with Penn Entertainment, which will provide it with $1.5 billion in cash over the next 10 years.

But the leagues also need cash, especially as the regional sports network business is under threat. Teams pay players in large part from the sports rights fees. ESPN’s bids serve an essential role in how the leagues earn money. The organizations can generate competitive bids for packages of games because ESPN is almost always a potential buyer.

Disney CEO Bob Iger said during Disney’s earnings conference call Wednesday that the company is “not necessarily looking for cash infusion” if partners could provide other assets — such as content — as the company transitions ESPN to a direct-to-consumer business. Sources say Disney is targeting 2025 as a potential launch date for an unbundled-from-cable ESPN streaming service. While ESPN+ exists today, it doesn’t include ESPN’s most valuable live sports such as Monday Night Football and most NBA playoff games.

Disney has informed the leagues that it’s also holding separate talks with strategic investors who can provide distribution benefits, according to people familiar with the matter.

“We’re looking for partners that are going to help ESPN successfully transition to a [direct-to-consumer] model,” Iger said Wednesday. “And that, as I’ve said, can come in the form of either content or distribution and marketing support or both.”

An MLB spokesperson declined to comment. An NBA spokesperson said, “we have a longstanding relationship with Disney and look forward to continuing the discussions around the future of our partnership.”

Iger reiterated Wednesday that he wants to keep a majority ownership stake in ESPN. Iger told CNBC’s David Faber last month that Disney is “not necessarily” looking at spinning off ESPN.

Still, it’s possible Disney could maintain a majority ownership in ESPN while also spinning it off. That option is “on the table,” according to a person with direct knowledge of Disney’s plans.

A spin off of ESPN would give potential partners clarity on the value of their minority stakes if it trades publicly and separately from Disney. Within Disney, ESPN’s value would be clouded by the larger parent company.

Next quarter, Disney will begin to report ESPN’s finances separately from the rest of the company — another potential precursor to a separation. Former Disney head of strategy Kevin Mayer, who is now advising Iger on the future of ESPN along with former Disney Chief Operating Officer Tom Staggs, has previously championed spinning off ESPN so that the linear business won’t drag down Disney’s growth prospects, CNBC reported last week.

For decades, ESPN has been Disney’s crown jewel, generating billions in profit from lucrative pay-TV subscription fees. ESPN is by far the most valuable cable network, charging nearly $10 per month per household for every U.S. cable subscriber, whether they watch the network or not.

Even as U.S. cable subscribers began cutting the cord, ESPN was able to counteract subscriber revenue losses by boosting the amount of money it receives from the pay TV distributors, such as DirecTV, Dish, Comcast, Charter and Cox.

Within the past 12 months, that trend reversed itself, according to people familiar with the matter.

Still, ratings having increased this year on ESPN’s linear channel even as cord cutting has accelerated. Advertising revenue increased 10% over last year in the most recent quarter “adjusted for comparability,” Iger said Wednesday, as brands look for live events where commercials can’t be skipped.

“The bundle is decaying and they need to come up with a new revenue model,” former ESPN CEO Steve Bornstein said on CNBC on Wednesday. “It’s an evolutionary process, and I think [ESPN] is going to be incredibly well-positioned. The people involved at ESPN today are probably the best executives I’ve ever come across. [ESPN President] Jimmy Pitaro, Kevin Mayer, Bob Iger and Tom Staggs? They’re going to figure out this problem.”

Disney will have to decide if it’s more strategic to keep ESPN’s positive free cash flow to reinvest in streaming entertainment or if spinning off an asset with declining growth trajectory makes more sense.

Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC.

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