original post 8/13/2015
For Disney (NYSE:DIS) investors, it’s been a tremendous decade of returns. Under the leadership of current CEO Bob Iger, Disney stock has increased 320% over the past 10 years, compared to nearly 70% for the greater S&P 500, and now sits near all-time highs as the company continues to reward investors.
And while Iger gets credit for Disney’s strong run, he has provided tremendous value with his purchases of Pixar, Marvel, and Lucasfilm. But perhaps the best acquisition was made by Iger’s predecessor, Michael Eisner, when the company purchased ABC/Capital Cities in 1995 for $19 billion. But let’s be honest: It wasn’t that Eisner bought the ABC network. Rather, it was because ABC/Capital Cities had purchased sports network ESPN a decade before.
Instead, the person Disney’s shareholders should thank is ESPN’s founder, Bill Rasmussen, the man responsible for the network that analyst firm Wunderlich Securities assigned a stand-alone value of $50.8 billion last year. Using 80% of Wunderlich’s number (more on that later), ESPN was nearly 30% of Disney’s total value.
A journeyman network
The most interesting thing about ESPN, now the most expensive cable network, was its somewhat inauspicious start. Rasmussen came up with the concept after being fired by the Hartford Whalers when the team missed the playoffs in 1978. The company’s first sponsor, Anheuser-Busch (now Anheuser-Busch InBev), paid nearly $1.4 million to be the official beer on the network. The second, Getty Oil, later went on to buy a dominant controlling position from Rasmussen a year later.
However, even Getty Oil could not provide the capital in order to secure the expensive rights deals for live sports. Fortunately, major network ABC saw the value in focused, lifestyle-based programming and purchased 100% of the company from Rasmussen and Getty Oil (Texaco, at the time) in 1984, buying 15% in January and the remaining 85% in May for roughly $218 million total.
Interestingly enough, ABC beat out media mogul Ted Turner, who essentially brought this 24-hour focused concept to news with CNN. With Turner angry, ESPN took the offer from ABC without seriously soliciting bids from other potential acquirers.
Later in 1984, Nabisco brands paid $60 million in cash to claim 20% of ESPN from ABC, valuing the network at $300 million, and held onto that stake until 1990 when it sold its position to private media conglomerate The Hearst Corporation for approximately $170 million — good for an annualized return for Nabisco of nearly 19% over the six years it held its stake. Hearst continues to hold its stake in ESPN.
ESPN and Disney today
For Disney, an entertainment conglomerate, movies and theme parks may make for more interesting copy, but the company is — at heart — a cable and broadcasting company. For this fiscal year, its media networks division is responsible for 45% of Disney’s total revenue and 54% of its operating income. ESPN is by far the star of this division, with cable analytics firm SNL Kagan estimating ESPN costs each subscriber $6.61 per month, regardless of whether they watch the channel.
Disney receives 80% of that total, but it was started by an unemployed sports fan with an idea of a 24-hour news network. In 1994, Sports Illustrated honored Bill Rasmussen as one of the 40 individuals who had the greatest impact on the world of sports over the past 40 years. Long-term Disney shareholders should be equally as grateful.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Walt Disney.