Nelson Peltz's attempt to join Disney's board could force much-needed accountability

Published Thu, Jan 12 20235:05 PM EST

If Nelson Peltz were to win his fight to join Walt Disney 's (DIS) board of directors, the activist investor could force a level of accountability at the company that's sorely needed. Peltz is the CEO and founder of Trian Partners, an investment firm that owns 9.4 million shares of Disney valued at nearly $940 million based Thursday's close under $100. The firm late Wednesday issued a white paper, making a case to put Peltz on the board to help remediate Disney's problems, including corporate governance challenges, poor strategy and operations, as well as deteriorating financial performance. "The total shareholder return over one, three, five, 10 years has materially underperformed the S & P 500 and underperformed the proxy peers that the companies selected," Peltz said on CNBC Thursday. "Equally as important, there are a lot of retail investors in this company. They [Disney] eliminated the dividend that was in effect for 57 years. … We think that we can help." DIS 5Y mountain Disney (DIS) 5-year performance Peltz's proxy battle for a board seat comes at a time when Disney's stock has fallen roughly 52% from its all-time high in March 2021 of $203. Shares of Disney rose more than 3.6% on Thursday. Disney's board made the decision to not endorse Peltz and swiftly announced Wednesday that they named Mark Parker, a director since 2016 and executive chairman at Nike (NKE), as chairman, succeeding Susan Arnold. Peltz highlighted that Parker, who will now chair two companies at the same time, voted for Disney's 21 st Century Fox acquisition, valued at more than $70 billion. The merger, completed in March 2019, put Disney's balance sheet in a precarious position. "Fox hurt this company. Fox took the dividend away. Fox took what was once a pristine balance sheet into a mess," Peltz argued. The Club's take Peltz makes a strong case that Disney's fundamentals have changed. The company has underperformed as a result of its poor management and governance decisions, and we do not disagree. He has a wealth of experience in serving on numerous boards — and we think at the least, it's worth hearing out his thoughts, especially since he has a lot of skin in the game. Disney's free cash flow has dropped 89%, its adjusted earnings-per-share has been cut in half and its dividend to shareholders was eliminated in 2020 — all disappointing numbers for shareholders. We bought Disney shares at a higher price in hopes that previous CEO Bob Chapek would add more theme parks and collaborate with Club holding Meta Platforms (META) in the metaverse. That didn't happen. The company's billion-dollar losses in its streaming business have been a tough pill to swallow. So much so that Chapek was fired and former Disney boss Bob Iger returned as CEO. Peltz's track record Peltz has had success serving on several company boards. He's currently non-executive chairman at Wendy's (WEN), serves as a director at Unilever (UL). He's previously served as a director at Club holding Procter & Gamble (PG), as well ass Sysco (SYY), Kraft Heinz (KHC), among many others. In companies that Trian invested in — and Peltz served on the boards — the companies' total shareholder return, on average, has outperformed the S & P 500 by roughly 900 basis points annually, Peltz said. In 2017, he narrowly lost a proxy fight with P & G. But because the election results for Peltz's director bid were so close, Procter appointed Peltz to the board anyway. Peltz served on the company's board from March 2018 through October 2021, during which P & G stock increased 81%. What's more, when asked about his media experience or lack thereof, Peltz said his firm has invested in entertainment giants, including Lions Gate (LGF.a), Time Warner and CNBC-parent Comcast (CMCSA). Moreover, the Trian founder said he has a long track record of advising companies on how to strengthen their consumer brands. Disney, Peltz explained, "is a lot more than a media company." He argued, "This is a consumer company with a basket full of the greatest brands in the world." Chapek's firing and Disney+ The return of Iger in November came after Disney reported dismal fiscal fourth-quarter earnings under Chapek. Shareholders were particularly disappointed by the entertainment giant's mediocre direct-to-consumer streaming business, which includes Disney+, Hulu and ESPN+, that has yet to reach profitability. But overall, Chapek, who was Iger's hand-picked successor, had a challenging two years as the top executive. "I don't know that he was given the opportunity to do his job," Peltz said when asked by Jim Cramer how Chapek's firing played out, suggesting Iger appeared to still be in Chapek's shadow. Peltz said he's not looking to remove Iger, who is working on finding a new successor. "My goal would be to work collaboratively with Bob Iger and other directors to take decisive action that will result in improved operations and financial performance," Peltz outlined in Trian's white paper. "My goal is to reduce corporate overhead to the point that the company gets better," Peltz added. Disney's streaming business lost nearly $1.5 billion last quarter. Management has repeatedly said its goal is to reach profitability for Disney+ by fiscal 2024. Disney is set to report fiscal 2023 first-quarter earnings after the closing bell on Feb. 8. Given Disney's distressed balance sheet, Jim asked Peltz about streaming service Hulu. Disney currently owns two-thirds of Hulu and has the option to buy the remaining 33% from Comcast. "I think they have to buy Hulu, or they have to get out of the streaming business," Peltz said. "Unfortunately, that means that this company will have a debt load going forward for several years." (Jim Cramer's Charitable Trust is long DIS, META, PG. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORM