NEW YORK — In an apparent attempt to revive its stalled stock price, the Walt Disney Co. is contemplating a reshuffle of its Internet assets through the possible $1.5 billion purchase of the outstanding 57% in its Internet affiliate, Infoseek, the Mouse House confirmed Monday.
Infoseek, with which Disney partnered last year, operates the Go Network and jointly operates Disney Web sites such as ABCNews.com and ESPN.com.
Disney may pay for the acquisition by issuing Infoseek’s public shareholders a “tracking stock” to reflect the combined Internet assets of Disney and Infoseek, Disney said in a filing with the Securities & Exchange Commission.
Tracking stocks are designed to reflect the value of a company’s specific assets without any change in legal ownership.
No formal agreement
Disney emphasized it had “not reached any final determination as to whether to proceed with any such transaction or with respect to its structure or terms.”
Infoseek CEO Harry Motro confirmed the talks, noting in a statement that “the goals of these discussions, which are far from complete, extend the vision of our strategic relationship with Disney” and that “these goals include bringing together the Internet properties of Disney and Infoseek under one roof.”
Separately, Disney announced a management shakeup at its Buena Vista Internet Group. Steve Wadsworth was named to run the group, replacing Jake Winebaum, who is leaving to form a new Internet company called eCompanies partly backed by Disney.
eCompanies will “develop and invest in Internet startups,” it said. Winebaum’s partner in the new company is EarthLink founder Sky Dayton.
Disclosure of Disney’s talks with Infoseek sent the Internet company’s stock price rocketing $6.31, or 17%, to $43, putting a $1.5 billion value on the 57% of the company not owned by Disney.
Disney’s price rose 25¢ to $30.87. It had jumped $1.62 Friday on rumors of an Internet spinoff.
Disney stock has been in the doldrums for several months, reflecting the company’s uninspiring earnings performance in the past year and recent warnings that it didn’t expect a recovery in earnings in the short term.
But Wall Street analysts reacted skeptically to Monday’s disclosure, noting that Infoseek was already effectively a proxy for Disney’s Internet assets.
Disney acquired its existing 43% stake in Infoseek late last year in exchange for its interest in Internet company Starwave. The Mouse House has since made a big splash about the Go Network, which was launched in January.
“Presumably, Infoseek stock (already) reflects the value of the Disney brands and content,” said David Simons, managing director of Digital Video Investments. “That was the whole idea of the deal in the first place. So what additional value does Disney bring to this? Or would a transaction just re-create Infoseek under the name of Disney.com?”
Infoseek, like most Internet companies, is losing money heavily as it ramps up its business. It lost $160 million in the first half of the current fiscal year.
Disney now records a share of Infoseek’s losses in its profit statement; a $75 million write-off in the March quarter contributed to Disney’s 41% slump in net profits to $226 million.
Lehman Bros. analyst Larry Petrella said that issue of a tracking stock could benefit Disney’s earnings. The Mouse House could shift all its Internet losses into a subsidiary linked to the tracking stock, depending on how that stock is structured.
“It could reduce the negative impact of startup losses which are now hitting Disney’s earnings,” Petrella said.
Steve Wadsworth, who became president of Disney’s Buena Vista Internet Group Monday, noted that Disney has a “number of Internet assets which are not part of (the Infoseek) relationship directly,” such as Disney.com, Disney Store Online, ABC.com and Family.com.
But Wadsworth declined to elaborate on why Disney was contemplating the reshuffle. Asked why Disney didn’t simply sell its wholly owned Internet assets to Infoseek for extra stock, he said that was an option in addition to the tracking stock idea.
Contemplation of a tracking stock appears to represent an about-face for Disney. One Wall Street analyst said that in the past, Disney execs had expressed disdain for tracking stocks, which were commonly used by various companies in the mid-1990s including John Malone’s Tele-Communications Inc.
TCI, recently acquired by AT&T, issued a tracking stock to reflect the programming assets held in Liberty Media and a separate tracking stock to reflect startup businesses through TCI Ventures. Liberty still trades as a tracking stock from AT&T.
Several entertainment companies are contemplating spinning off their Internet assets into separate publicly traded companies, partly to give the showbiz giants a currency to use for Internet acquisitions. Current sky-high valuations on Internet companies makes it difficult for traditional companies to use their own stock to buy Internet companies.
But Disney is making the move after a correction in Internet stocks which has brought some of the valuations closer to earth. If the correction continues, analysts said, the rationale for Internet spinoffs may be reduced.