Why Does Nelson Peltz Even Get a Say About Disney?

Trian Fund Management CEO Nelson Peltz issued a press release on Jan. 11 that laid out the activist investor’s reasons for seeking a seat on Walt Disney’s (DIS) board. There is no question many of the points Peltz raises in his letter have merit.

On Thursday, both Peltz, appearing on CNBC, and Disney laid out their respective cases for investors. Now it’s time for both parties to do the activist dance. What happens as a result of this board battle will play out in the coming weeks. 

My question is this: Why does Nelson Peltz even get a say about Disney?

Trian Owns Just 0.5% of Disney’s Stock

As Peltz states in the first paragraph of his press release, Trian owns 9.4 million shares valued at approximately $900 million. Based on Thursday’s closing price, it’s more like $939 million. That’s 0.52% of Disney’s outstanding shares.

I’ve been writing about investments for more than a decade. It boggles my mind that someone with less than 1% of a company’s stock can make a play for a seat on its board. Sure, someone with 100 shares can attempt the same thing, which reflects the beauty of democratic governance.

However, in theory, only wealthy men and women like Peltz or institutional managers can move the needle regarding board seats, etc. Everyday investors are at the mercy of the Big Fish. 

Nelson Peltz has been doing this kind of thing for years

Sometimes his activist schtick works -- mostly with consumer goods businesses such as Heinz in 2006 and 2017’s battle with Procter & Gamble (PG) -- and sometimes it goes spectacularly wrong, as with Dupont.  

“The Brooklyn-born investor faced a setback at DuPont in 2015 when the company managed to fend off his boardroom challenge, winning support from three of its largest shareholders and retail investors,” The Financial Times wrote on Jan. 13. “The chemical goods group had offered Trian a board seat, but said Peltz himself could not be the nominee, citing a lack of scientific expertise.”

Interestingly, Disney uses a similar defense, suggesting that Peltz is out of his league. 

“Nelson Peltz does not understand Disney’s businesses and lacks the skills and experience to assist the board in delivering shareholder value in a rapidly shifting media ecosystem,” Disney’s presentation stated.

If Peltz acquired 10% of the stock, I am more inclined to side with the activist and his desire for a seat on the board. But, with less than 1%, his lack of experience is a deal-breaker. 

One could argue that Peltz should be ecstatic about Disney appointing Mark Parker -- Nike’s (NKE) current Executive Chairman and former CEO -- as Chairman of the house that Walt built. On the board since 2016, he understands the business and was an integral part of building the world’s biggest sporting goods brand. 

And, before you say, “Well, he’s been on the board since 2016, so he’s part of the problem,” remember that things were pretty good at Disney -- DIS hit an all-time high of $203.02 in March 2021 -- before the losses from its streaming business started to mount. 

None of Disney’s problems are easily solved. Peltz isn’t the guy to rescue its stock. Iger is.

The Difficult Task at Hand

There are three things that the board wants to accomplish over the next 24 months while Iger is under contract as Disney CEO.

First, it needs to cut costs. So to slow the expense train, Iger’s first move when he returned in November was to keep the company’s hiring freeze in place while he examined where further cuts were required beyond those initiated by Bob Chapek before the board dumped him.

This feud with Peltz has been bubbling since the middle of 2022. Disney claims that Peltz hasn’t made any concrete suggestions to them about cutting costs despite his claims of “excessive costs” and “over-the-top” compensation. 

Almost anyone would be able to recognize that as a multi-billion-dollar company, Disney has fat to trim. It doesn’t need Peltz to tell them that.

Secondly, tied to costs, is to make its direct-to-consumer (DTC) business profitable sooner rather than later. The DTC business is on track to lose $3 billion in 2023. To start righting the DTC ship, Iger removed Chapek’s right-hand man, Kareem Daniel, the former head of Disney’s Media and Entertainment Distribution division. 

One move that could help give Disney more time is to sell its 67% stake in Hulu to Comcast (CMCSA), which owns the other third. Assuming Comcast is interested, their agreement values Hulu at a minimum of $27.5 billion. A sale would net Disney more than $18 billion. 

A third option is to spin off ESPN and ABC, although that would be much more complex and time-consuming.

Lastly, by the end of 2023, Iger and the board must have identified some serious candidates to replace him. But, unfortunately, the board failed to do its job the first time by letting Iger dawdle until Chapek was the only option. 

It won’t make the same mistake. Peltz offers nothing on this front.       

Peltz Isn't the Right Person

If a white knight came to Disney’s rescue here, such as Warren Buffett and Berkshire Hathaway (BRK.B), the board would likely be more inclined to consider a seat, but only if the investment were more significant than Peltz's paltry 0.5%. 

I’m not the only one who thinks 0.5% isn’t enough of a stake to get you a seat on Disney’s board.

“‘In our view should someone with half a per cent position who has held the shares for three months, should they get a board seat?’ said Dev Chakrabarti, chief investment officer for concentrated global growth at AllianceBernstein, a top-20 investor,” Financial Times reported.

“‘His record in the consumer space is overall good,’ Chakrabarti said, ‘but we don’t view him as a media operator.’”

Disney shareholders will likely consider voting for Peltz at the general meeting because the stock has fallen so much in the past two years. However, that would be a mistake. There is nothing that Peltz could provide Disney that Third Point’s Dan Loeb already hasn’t.
 

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