Hulu's parents – Walt Disney Co. and Comcast Corp. – have agreed to an amicable divorce, giving the Burbank entertainment giant full custody of the streaming video site.
Wall Street had been watching closely to see how the two media giants would resolve their issues over ownership of Hulu, the popular 11-year-old service. On Tuesday, the companies jointly announced that Disney immediately would assume operational control of the Santa Monica-based company and that Comcast would sell its stake by January 2024.
The deal establishes a minimum total valuation of Hulu at that time of $27.5 billion, which means Comcast could reap more than $9.1 billion for its 33% interest as long as it continues to invest in the service. That amount represents a staggering premium to Hulu's current valuation of about $15 billion.
"Disney's purchase of Hulu is costly but important," Fitch Ratings director Patrice Cucinello said in a research note. "By shoring up its presence in the direct-to-consumer space, Disney hopes (to) offer enough value to catch cord cutters."
Hulu is the fourth-largest streaming service in the U.S., behind Google's YouTube, Netflix and Amazon Prime. Taking full control of Hulu bolsters Disney's focus on direct-to-consumer distribution of its programming.
For more than a decade, Hulu has been controlled by a triumvirate of entertainment powers: Disney, Comcast's NBCUniversal and Rupert Murdoch's 21st Century Fox. The venture became tricky to manage because the three principal owners had separate agendas and, occasionally, conflicting goals. Then, in March, Disney gained the majority stake as part of its purchase of much of Fox.
Disney wanted to call the shots at Hulu, which offers such shows as "The Handmaid's Tale" and network hits including Fox's "Family Guy" and NBC's "Saturday Night Live."
Relations with Comcast have been strained for more than a year: Comcast Chief Executive Brian Roberts last year jumped into the bidding for Fox, driving up the price that Disney ultimately had to pay. Comcast also wrestled away an asset that Disney wanted: the European television service Sky. Some analysts had wondered whether the Philadelphia cable colossus would stick around in the Hulu joint venture as a fly in the ointment for Disney CEO Bob Iger.
"But this agreement clearly shows that the two companies can work together in an interdependent way," said Eric Schiffer, CEO of private equity firm Patriarch Organization in Orange County, who was not involved in the deal. "And it represents another win for Disney."
The company is launching a $6.99-a-month streaming service in November – Disney+ – that will offer a wide array of the company's TV content and movies. Disney wanted to offer consumers the option of subscribing to a package that included Disney+ and Hulu. Having control of Hulu allows Disney to do just that. The company also can offer advertisers the flexibility of inserting their commercials over multiple digital platforms.
"We felt that (full control) was really important long term in terms of the direction we are taking the company," Iger said Tuesday during an appearance at an investor conference shortly after the deal was announced.
"It's the third prong in our direct-to-consumer strategy with ESPN+ and Disney+," Iger said. "It will give us the ability to bundle, which is a big deal."
Consumers could opt for all three of Disney's services using one password and paying one bill.
Hulu, which is expected to have a $1.5-billion operating loss in the current fiscal year, has more than 25 million subscribers. That translates into nearly 64 million domestic users because several people typically share a subscription, according to research firm EMarketer.
And the streaming market continues to grow. Adults in the U.S. will spend an average of one hour and 37 minutes each day watching digital video this year, an increase of more than 8% compared with 2018, according to EMarketer.
Consolidating Hulu gives Disney another important asset to use to expand internationally, which is a key driver for U.S. media companies now that the domestic market is mature.
"We have plans to roll out Hulu internationally.... This makes it easier for us," Iger said at the MoffettNathanson investor conference. "But we are going to walk before we can run – we obviously have a lot on our plate right now."
For Comcast, the deal allows the company to eventually exit a non-core asset at a huge premium. Comcast's subsidiary, NBCUniversal, was one of the founders of Hulu. Comcast, however, is planning to roll out its own advertising-supported streaming service next year to compete with Disney+, Netflix and potentially Hulu.
The deal will keep NBC's content, such as "Law & Order," "Will & Grace" and "Brooklyn Nine-Nine," on Hulu at least until 2024, which will keep Hulu vibrant and provide NBCUniversal with a continued revenue stream of licensing fees.
In return, NBCUniversal also will get the rights to carry shows licensed to Hulu on its own direct-to-consumer streaming service. But Comcast eventually will have the ability to shift its content to its own platforms.
"This is a perfect outcome for us," NBCUniversal CEO Steve Burke said in a statement. "The extension of the content-licensing agreement will generate significant cash flow for us, while giving us maximum flexibility to program and distribute to our own direct-to-consumer platform, as we build that business."
Comcast shares closed up nearly 1.5% at $42.91. Disney, which has been trading at all-time highs, finished up 1.4% at $133.20.
Hulu launched in 2007 as a joint venture between NBC and Fox. It has grown into one of the most popular streaming services because it's filled with hits from the broadcast networks. Disney joined the service in 2009, and Time Warner Inc. eventually took a 10% stake. Last month, telecommunications giant AT&T Inc., which now owns the Time Warner properties, sold its interest in Hulu for $1.43 billion. AT&T is struggling with more than $170 billion in debt that it took on to finance its ventures into media, including buying DirecTV in 2015.
Comcast agreed to help Disney buy AT&T's stake in the service.
Now, Disney can cluster its edgier programming, such as "Black-ish" and "Family Guy," and hits from FX including "Atlanta," "It's Always Sunny in Philadelphia" and "American Horror Story," on Hulu.
"The content on Hulu is far more adult-focused than what Disney is planning for Disney+," Schiffer said. "And this furthers the Iger domination strategy of streaming and reinforces the strength of what that company already has."