A recent Wall Street Journal article quoted research firm Sanford C. Bernstein valuing Disney’s (NYSE:DIS) ESPN at $42 billion.  This may seem like a mind-boggling figure but a close look at ESPN’s metrics makes it clear that it is not all that surprising. In fact, we have a similar valuation for ESPN in our pricing model that breaks down a company’s value into major services and products.
We estimate that ESPN constitutes close to 44% of Disney’s value. We further estimate Disney’s stock price at $54.60, implying a valuation of close to $98 billion. This implies that ESPN is a $43 billion business for the company! As we have written in the past, it is no surprise that other media companies such as News Corp (NASDAQ:NWS) and Comcast’s (NASDAQ:CMCSA) NBCuniversal are trying to strengthen their sports programming. Are you wondering how ESPN can be valued so high? Let’s take a look at some of the key drivers behind this business.
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We estimate that ESPN will bring close to $11 billion in revenues for Disney in 2012. These include revenues from primary ESPN channel, as well as its other sister channels such as ESPN2, ESPNU, ESPNEWS, ESPN Classic and ESPN Deportes. A large chunk of these revenues, approximately $10.3 billion, will come from ESPN and ESPN2 alone. If we dig deeper, we find that close to $9.1 billion will come from just ESPN, with ESPN2 contributing approximately $1.2 billion in 2012.
How is ESPN generating $9+ billion in revenues annually?
The channel has close to 100 million subscribers in the U.S. which speaks to the huge demand as well as bundling strategies that pay-TV service providers adopt. Additionally, ESPN charges more than $5 per month per subscriber, by far the highest carriage fee in the pay-TV industry, except for a few premium cable networks such as HBO. However, HBO has a much smaller subscriber base. It is remarkable that ESPN has been able to reach 100 million subscribers in the U.S. despite its high carriage fee. In addition to over $6 billion generated through subscription fee, ESPN generates close to $3 billion in ad revenues. ESPN enjoys an average daily viewership of over 1 million, and charges high ad prices from its advertisers. We estimate this pricing to be around $16-$17 per 1,000 impressions. This is a huge amount but its advertisers are big companies with high spending capacity that target male audiences (typical audience for sports channels).
While overall revenues from ESPN and its sister channels stand at around $11 billion, EBITDA (earnings before interest, tax, depreciation and amortization) stands at close to $5 billion, indicating margins of 45%. If we deduct additional expenses such as taxes, capital expenditures, change in networking capital, etc., we find that ESPN will generate close to $3.4 billion in cash profits in 2012. Taking into account Disney’s 80% stake and a discount rate (risk) of 8.5%, we find that ESPN is worth $43 for Disney.Notes: