A battle is brewing between Disney and activist Peltz. Here’s how the situation can unfold


A masked family walks past Cinderella’s Castle in the Magic Kingdom, at Walt Disney World in Lake Buena Vista, Florida.

Orlando Sentinel | Tribune News Service | Getty Images

Activist investor Nelson Peltz is planning a proxy fight for a seat on Disney’s board.

Disney offered Peltz, founder of Trian Fund Management, a role as an observer of the board and asked him to sign a standstill agreement, which Peltz declined. Here are our thoughts on the situation.

Offer of a board observer position

Sometimes a board observer position can be beneficial, particularly for investors who do not have much board experience and are less likely to participate regularly in board discussions. But offering Peltz a position as board observer is like telling Whitney Houston, “You can join the band, but you can’t sing.” Disney didn’t think for a second that Peltz would accept this offer, and he definitely shouldn’t have accepted it.

Why is this happening?

It’s curious why Peltz started this proxy fight in the first place and why Disney is against it. Peltz gained his position when Bob Chapek was CEO and likely had a plan to replace him with someone Peltz had already identified. That would have been a great activist plan, but it went awry a week later when Disney announced it had replaced him with former CEO Bob Iger. Knowing Trian’s history and process, the company had likely been working on that plan for many months, waiting for the perfect time to build its position. It’s a pity that all of Trian’s hard work to develop its plan came somewhat to naught, but at that point the company should have regrouped and developed a different approach, taking into account the new circumstances. That plan should not have included opposition to Iger. While Trian says it is not opposing Iger as CEO now, the company initially opposed him, making it very difficult for the board to agree on a settlement for a board seat for Peltz. That said, a strong board with a strong CEO—who is admittedly a short-term CEO—should have no problem with an experienced shareholder in the room who may hold an unpopular opinion. In fact, the board should applaud it.

Trian’s claims

Trian gave a presentation in which he made his plea. In proxy fight presentations, each side uses the facts and data to paint a picture that benefits them and often those claims don’t stand up to scrutiny. For example, Trian objects to Disney’s total shareholder return under Iger: 270% versus 330% for the S&P 500 about the same time. I’m not sure how that compares to the industry, but I expect if industry returns were more favorable to Trian, they would have used it. As British economist Ronald Coase said, “If you torture the data long enough, it will confess everything.” In this case, we can say that Bob Iger was a bad CEO for Disney. Trian also disagrees with Iger’s decision to take over Fox, and he should – in hindsight it was a terrible decision. But he should also include in that analysis Iger’s decisions to acquire Pixar, Marvel and Lucasfilm, which have grossed Disney more than $33.8 billion at the global box office, and billions more in merchandise and theme park expansions.

Nelson Peltz as director

All this criticism of proxy fighting tactics and strategy aside, and no matter how much we torture the records of Peltz’s record as a director, he should of course be on the Disney board. He is a major shareholder with a strong track record of creating value through operational, strategic and capital allocation decisions. No, Peltz won’t be the most valuable director when it comes to deciding who should star in the next blockbuster Disney movie or what rides to build at the theme parks — the board relies on management for those insights. But he will be the most prepared and valuable board member when it comes to conducting the financial analysis of the various strategic and capital allocation options available to Disney and advising the board on what decisions are best for shareholders. Peltz has also proven to be a valuable director in helping management teams reduce operating costs and improve margins, something Disney could use. And if his past is any indication, he’ll likely be good friends with Bob Iger by the end of his term.

Chance to win

Unfortunately, I think the deck is stacked against Peltz here. It’s a huge effort to get big institutional investors to vote against the board of an iconic company like Disney. That task becomes even more difficult when the company has just dropped its CEO and replaced him with a respected former CEO and replaced its chairman. On top of that, Disney recently settled with another top activist, Third Point, who had many of the same suggestions Trian makes. I believe Institutional Shareholder Services and large institutional shareholders will want to give this new team at least a year to work on their plan before supporting more changes in the business. And I don’t think the universal proxy will make that much of a difference in a proxy fight for one director in a unitary government. That said, while I don’t own any Disney stock in my fund, my 10-year-old and 12-year-old own a small number of shares and when their ballots come in the mail, we’ll be voting for Nelson.

Ken Squire is the founder and chairman of 13D Monitor, an institutional research service on shareholder activism, and is the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments. Squire is also the creator of the AESG™ asset class, an activist investment style aimed at improving portfolio companies’ ESG practices.

Source link


Please enter your comment!
Please enter your name here