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With AT&T's Exit, Disney Takes Firmer Control of Hulu

And then there were two.

Less than a month after Disney (NYSE: DIS) closed its acquisition of Twenty-First Century Fox, which included its 30% share of Hulu, the streaming service itself has acquired AT&T's (NYSE: T) 9.5% stake. That leaves just Disney and Comcast (NASDAQ: CMCSA) as the joint owners of the popular television streaming service.

The deal valued Hulu at $15 billion, providing AT&T with $1.43 billion for its share. Disney and Comcast have not yet said how they will split the equity, but given their prior stakes, a conventional split would give Disney two-thirds of the company and Comcast the other third.

The move makes sense for both AT&T and Disney. And Disney was able to save a bit of money by having Hulu buy out AT&T's share.

Image source: Hulu

AT&T needs cash now

AT&T has racked up a lot of debt over the past few years to finance its acquisitions of DirecTV and Time Warner (now WarnerMedia). At the end of 2018, the telecom giant had $176.5 billion in debt on its balance sheet.

AT&T plans to pay down $20 billion of that this year, and the $1.4 billion from Hulu should help. The company also plans to sell off other non-core assets to raise funds for the purpose, but the vast majority of the money will still have to come from AT&T's free cash flow. Given that the company expects free cash flow of about $26 billion, investors should expect another minimal dividend increase next year, just to keep up its 35-year streak. AT&T has raised its quarterly payout by just $0.01 each year since 2008.

Owning a stake in Hulu had ceased to make much sense for AT&T. The telecom giant is launching its own subscription video on demand service later this year on the back of WarnerMedia's content library. The service, to be offered in three pricing tiers, will feature content from Warner Bros. studios and HBO, and it will naturally compete with Hulu and Disney+ for subscribers. For now, though, WarnerMedia content will continue to be available on Hulu.

Disney wants more control

Disney has big plans for Hulu. At its Investor Day event earlier this month, the company said it expects the service's subscriber base to grow from its current 25 million to between 40 million and 60 million by 2024.

CEO Bob Iger has said he sees opportunities to invest more in Hulu and expand the service internationally. Since it sold its Japanese operations several years ago, it has operated exclusively in the United States.

If Disney is going to invest in growing the service to make it more profitable over the long term, it wants a bigger share of the company in order to reap more of the benefits. While the House of Mouse expects Hulu to book $1.5 billion in operating losses this year, it forecasts that the service will shift to profitability by 2023 or 2024.

Comcast will still own a minority stake in Hulu, but it's planning to launch its own competing streaming service early in 2020. That service could result in more NBCUniversal content being held back from Hulu in favor of Comcast's 100%-owned service. Compared to Disney, both AT&T and Comcast have relatively unclear visions about how they'll manage their content rights when they launch their own streaming services. Disney is keeping everything it produces for either Hulu or Disney+.

Ultimately, Comcast may sell its stake to Disney in order to focus on its own streaming service, but it'll be happy to let Disney grow the business for it in the meantime.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.


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