AT&T-Time Warner Merger Could Impact Disney’s ESPN

The creation of a new media giant with the acquisition of Time Warner by AT&T could cause strategic challenges for Disney and its ESPN unit, according to a new analyst report. Omar Sheikh of Credit Suisse notes that AT&T-Time Warner will have significantly larger earnings and cash flow than Disney. It will also have more than 50 million direct customer relationships in the US alone. “This will confer an enhanced ability to bid for sports rights from 2021 onwards, and thereby put pressure on Disney to invest further in ESPN’s direct to consumer distribution capabilities,” Sheikh said.

AT&T owns DirecTV, which has had to spend aggressively to keep its exclusive Sunday Ticket deal with the NFL. Sheikh suggests that Disney could grow by buying Twitter or Netflix, the companies it has been linked to recently. Or it could build its own capabilities. “We believe the organic option would be significantly less costly and give Disney the opportunity to tailor new services around its own IP,” he said. Credit Suisse continues to rate Disney stock “Outperform,” but Sheikh has lowered his earnings forecast for 2017. He cut his 2017-18 forecast 2%-4% to a range of $6 to $6.79 per share from $6.13-$7.09 a share. The cuts were driven by double-digit reductions in expectations for Disney’s cable networks and its consumer products group. He also cut his target price for Disney stock to $125 from $128.