Disney mulls paper cut

Sale eyed of publishing unit; quarter net up 51%

NEW YORK — Walt Disney Co. increased net profit 51% in the first quarter of fiscal 1997 to $749 million, it said Tuesday, at the same time disclosing its decision to explore options for the divestiture of the newspaper and magazine publishing unit acquired with ABC last year.

The publishing unit is expected to fetch about $2 billion, Wall Streeters said, with potential buyers including Hearst Corp., KIII and Reed Elsevier (parent of Daily Variety). The unit includes magazines like Los Angeles and Institutional Investor, daily newspapers such as the Ft Worth Star-Telegram and trade publications like Multichan-nel News, but not Disney’s Hyperion book arm.

The sale decision was long expected on Wall Street, and a Disney spokesman confirmed the company had received “plenty of expressions of interest” in the businesses since the ABC acquisition.

The major stumbling block in putting together a deal, investment bankers said, is that Disney would likely face a huge tax bill in a sale. Disney is also considering divesting the interests through a tax-free spinoff — in which Disney shareholders would get stock in a new publishing company — as well as an asset swap with another com-pany, a Disney spokesman said.

Disney, meanwhile, confirmed its plans to acquire joint control of E! Entertainment Television from Time Warner Inc. (Daily Variety, Jan. 27) in a deal with cabler Comcast Corp., which now owns 10.4% of E! and has the right to buy Time Warner out. Disney is putting up the $320 million in cash needed for the buyout, but Comcast will control the joint venture (see related story, this page).

Disney stock jumped 4% to a high of $74.75 Tuesday morning on news of the earnings result and the publishing divestiture plans, although the stock eased back to close the day up $1 to $72.62.

The first-quarter profit was “pretty damn solid,” said Lehman Bros. analyst Larry Petrella, while Merrill Lynch analyst Jessica Reif said the profit was better than expected in every division. Enhancing the good news for stock-holders was Disney’s decision to raise its quarterly stock dividend 20% to 13.25¢ a share.

The bottom line was inflated by a $135 million profit on the sale of Los Angeles TV station KCAL and the first-time inclusion of ABC profits. (ABC was acquired in February last year). Adjusting for both items, Disney’s net profit rose 18.4% to $669 million on 6.5% higher revenue of $6.27 billion in the period, which ended Dec. 31.

Disney’s “creative content” division (which includes the film arm, publishing and consumer products) increased revenues 5% to $3.2 billion. Operating income, before interest and taxes, rose 10% to $719 million, driven by do-mestic box office performance of “Ransom” and “101 Dalmatians” and the video release of “Toy Story.”

Broadcasting, which includes the ABC network and station group as well as ESPN, increased operating income 38% to $470 million on 4% higher revenue of $1.9 billion.

Disney’s accounting change on ABC’s program amortization continues to mask the impact of the ABC network’s ratings decline, which the Mouse House conceded in its statement. It noted that results for the quarter “also re-flected revenue growth at ESPN and increased political advertising revenues” at the owned-and-operated TV sta-tions.

Disney’s theme park business increased operating income 21% to $238 million on 16% higher revenue of $1.15 billion.

Disney did not break out any details about the earnings of the publishing division. The unit had been expected to be sold since the ABC acquisition closed a year ago; however, Disney had until now refused to give any clue as to its intentions.

Disney said Tuesday it intends to “begin exploring its strategic options” regarding the publishing businesses, al-though a spokesman made clear the options focused only on ways to divest the unit. He said the publishing busi-nesses to be divested were “not as good a strategic fit as the rest of the ABC properties.”

“Our background is entertainment, and entertainment companies tend to grow at a faster rate than publishing com-panies,” the spokesman added.

In a report earlier this month, Petrella predicted that the publishing unit would increase cash flow just 5.7% in fis-cal 1997, compared to 18% at the filmed entertainment group. Analysts estimated the unit has cash flow of be-tween $170 million and $210 million and valued it at between $1.5 billion and $2.5 billion.

A Disney spokesman said the money raised from the sale could be used to pay down debt, which stands at about $12 billion, or for reinvestment in businesses, or to buy back stock.

Bankers said Disney would likely get the most out of the sale by breaking the unit up — selling the newspapers separately from the trade publications, for instance. Tax considerations are also expected to play a part, although one banker said Disney is unlikely to make tax as much of an issue as companies like Tele-Communications Inc., which won’t sell an asset if it means paying tax. A Disney spokesman declined comment on the tax issues.

Alternative structures, such as asset swap or spinoff, can only reduce the tax liability slightly, bankers said.

While Disney is willing to swap a newspaper for a TV station (and would likely be keen to swap a bigger chunk of the group for Hearst’s 20% stake in ESPN, for instance), bankers said these asset swaps are only tax-free if the as-sets exchanged are similar businesses — which rules out most of these potential deals.

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