Sometimes you can see the plot twists in a TV show coming from a mile away. One could say the same for streaming service Hulu, which Disney $DIS just announced that it will buy out entirely for at least $8.6 billion.

Wait a minute — Calcbench did see that deal coming from a mile away, as far back as 2019! 

Back during that golden era of streaming services, our research team had a hobby of analyzing the disclosures of Hulu’s corporate owners to see what clues we could garner about its financial performance. If you knew where to look, you could piece together quite a bit.

As far back as 2016, we had a post about the three corporate owners of Hulu at that time: Disney, Comcast $CMCSA, and 21st Century Fox ($FOX). Those three had each owned 33 percent of Hulu until mid-summer, when they allowed Time-Warner to buy a 10 percent stake of Hulu. We also noted that Comcast had booked a loss of $65 million from Hulu in the first half of that year. Do the math, and it meant that Hulu was on track to lose $390 million that year. 

In May 2017 we had a follow-up post, again digging into disclosures at Comcast, Disney, and the other corporate parents. We estimated that Hulu lost $180 million in the first quarter of that year, although we never could deduce how much revenue the service was bringing in. 

By the time of our third post on Hulu in December 2017, much had changed. Most notably, Disney had proposed to buy most of 21st Century Fox’s entertainment assets — including Fox’s stake in Hulu. That deal ultimately did close, giving Disney a controlling interest in Hulu (its own 30 percent stake, plus Fox’s 30 percent). We also figured out that Hulu’s losses had ballooned in the last three years to the mid-nine figures. 

We published our longest analysis ever of Hulu in 2019. By then, Disney had bought out the 10 percent stake that Time-Warner had acquired back in 2016. Time-Warner paid $590 million for that stake in 2016; three years later, Disney bought it back for $1.4 billion. 

Here’s the critical part. When Disney acquired all those Fox assets, it disclosed the purchase price allocation — and included the value of its own 30 percent stake that Disney had previously owned. Figure 1, below, shows that Disney valued that 30 percent slice of Hulu at $4.74 billion.

Do some math again, and that implies a total valuation of $15.8  billion. Thanks to some other fine-detail negotiations, Disney actually owned 67 percent of Hulu at the time. Which means Comcast’s remaining one-third stake would’ve been worth $5.26 billion.

Now comes the big reveal. 

Disney and Comcast had also reached an agreement that come January 2024, either party would have the right to compel Disney to buy out Comcast’s remaining stake in Hulu for fair market value or total valuation of $27.5 billion, whichever is greater.

Disney is being cagey on what the exact final purchase price will be. The fair value will be assessed as of Sept. 30, 2023. The company said in a statement that “if the value is ultimately determined to be greater than the guaranteed floor value, Disney will pay [Comcast] its percentage of the difference between the equity fair value and the guaranteed floor value.”

We won’t know that exact final price until sometime in early 2024. Still, nobody who had been keeping an eye on the details should be surprised by any of this. For years, buried in the footnotes, were disclosures that showed steep losses at Hulu. Its valuation three years ago was $15.8 billion. Now the question is whether Hulu turned around its fortunes so quickly, and so dramatically, that its valuation will be worth more than the $27.5 billion floor price.

In other words, just like an episode of Only Murders in the Building, all you had to do was look for the clues there in the background all along. 

Disney Corp. filed its 2019 annual report this week, and devout readers of this blog know what that means — more Hulu news!

After all, Disney ($DIS) has been a long-time investor in Hulu, along with Fox Corp., Comcast (now NBC Universal), and Time-Warner. We’ve written about Hulu numerous times over the years, trying to piece together its financial picture from morsels of data those four firms disclose. Since Hulu itself is a private company, assembling a complete picture has been hard to do.

But earlier this year, Disney acquired most of Fox’s assets, including Hulu. That led to big changes in Hulu’s ownership structure and disclosures about its operations — and with Disney’s most recent annual statement, we’ve hit paydirt.

Let’s begin with how much Hulu is worth. Consider the following table from Disney that shows the purchase price allocation for its $69.5 billion acquisition of Fox assets back in March.

First, Disney updated its allocation from the original deal value in March. That’s unusual, but whatever, we’ll get into that another day. Look at the second to last line, where Disney values its original 30 percent stake in Hulu at $4.737 billion as of Sept. 30. That implies a total value of $15.79 billion.

Above that table is the footnote disclosure about Disney’s acquisition of Fox, and there we find much more information.

For example, we already know that with the Fox acquisition on March 20, Disney owned 60 percent of Hulu: its own 30 percent share, plus Fox’s 30 percent share. Then Disney bought out the 10 percent share owned by Time-Warner for $1.4 billion — which makes sense, because that would value Hulu at roughly $14 billion back in April. Which is at least in the ballpark of the $15.78 billion Disney says Hulu is worth today.

Those deals, plus some other negotiating, left Disney owning 67 percent of Hulu, and NBC Universal the other 33 percent. And since the estimated value of Hulu is $15.78 billion, that means NBC Universal’s one-third share is worth $5.26 billion.

Remember that value. We’ll get back to it momentarily.

Does Hulu Make Money?

Well, duh, of course not. But Disney’s 2019 report gives us new insight into just how much money Hulu is losing.

Disney reports that from the date of acquisition (March 20) until the end of the fiscal year on Sept. 30, Hulu had $1.938 billion in revenue and $774 million in losses. If those are the numbers for six months, then we can reasonably guess that Hulu’s full-year performance is roughly double those numbers — $3.876 billion in revenue and $1.548 billion in losses.

That’s consistent with a prior estimate we made back in February, where we calculated that Hulu had lost around $1.5 billion in 2018, based on the share of losses its various owners were disclosing then.

One can hope that starting next year, Disney will report Hulu’s full-year performance annually and we can be done with the guessing games. For now, however, revenue of nearly $3.9 billion and net losses at 40 percent are a pretty good guess.

Now let’s get back to that NBC Universal stake worth $5.26 billion.

When the Bill Comes Due

After those machinations with Fox and Time-Warner, Disney struck a deal with NBC Universal. Starting in January 2024, either party will have the right to compel Disney to buy out NBC Universal’s remaining stake in Hulu (either Disney can force NBC Universal to sell it, or NBC Universal can force Disney to buy it) for fair market value or $27.5 billion, whichever is greater.

Let’s state that more simply for clarity. That one-third stake in Hulu, which is worth $5.26 billion today even though the business is losing money hand over fist? NBC Universal has the right to sell it to Disney four years from now at a 5X markup.

We have many questions about that proposition. For example, in the Business Description segment of Disney’s disclosures, Disney says that Hulu currently has 29 million paying subscribers. None of Hulu’s past owners had disclosed subscribership in earlier years, but one Hulu executive said in February that the business had 25 million subscribers back then, with double-digit subscriber growth.

So the 29 million subscriber number makes sense. But if you divide those 29 million subscribers into that $3.876 billion in estimated annual revenue, that’s $133 per subscriber, or roughly $11.15 per month. (We’re cheapskates here at Calcbench and get the $5.99 minimum package.)

For Disney to justify that $27.5 billion price coming due in 2024, that implies a huge increase in revenue per subscriber (read: higher subscription fees), or a dramatic cut in costs, or some mixture of both. Like, Hulu is nowhere near turning a profit right now — let alone generating enough free cash flow to justify marking up the value from $5.26 billion to $27.5 billion.

In theory, Disney could cut those Hulu costs; Disney does have a bottomless pit of entertainment content, and the pit just got even more bottomless with the Fox acquisition. But Disney is shipping its best content to its new streaming service, Disney+. (We’re two episodes into “The Mandalorian,” by the way. Seems promising.)

So what’s the strategic plan here? Disney runs rival streaming services, where at least one is losing a fortune and has a balloon payment of $27.5 billion due in four years? We don’t know.

We just know the details are in the data — and you can find all that data on Calcbench to tell your own tale.

Comcast Corp. ($CMCSA) filed its 2018 annual report at the end of January, which gives us fresh opportunity to catch up on one of our pet interests: the value of Hulu.

We write about Hulu from time to time because it’s a huge player in streaming media, but isn’t publicly traded — so its financial data is somewhat hard to find. Then again, Hulu is owned by four entertainment giants: Comcast, Disney, and Fox, which own 30 percent each; plus Time-Warner with a 10 percent stake.

So if you know where to look in the filings of those companies, you can assemble a better, although still incomplete, picture of Hulu’s performance over the years.

The best place to look these days is the Comcast filing. There in the Investments section of its disclosures, Comcast reports that it owns a 30 percent stake in Hulu and recorded a $454 million loss in 2018 for its share of Hulu operations.

Well, do the math. If 30 percent ownership gives you a $454 million loss, that implies that Hulu’s total loss for 2018 was (gulp) $1.5 billion.

Yikes, we wondered, could that be right? So we pulled up Fox’s most recent annual report, which it filed last August. (Fox has a June 30 fiscal year-end.) There in the Investments section of Fox’s disclosures, it reported a loss of $445 million for its 30 percent ownership stake.

So, yes. Hulu loses a ton of money. We knew that already, based on previous posts we’ve written about Hulu. Still, for historical perspective, using those same calculations from prior years’ disclosures, Hulu’s losses have been…

• 2014: $20 million;
• 2016: $523 million;
• 2017: $716 million.

Wow. And why, exactly, are those losses ballooning so much? Consider this disclosure from Disney’s most recent annual report, filed last November:

The higher loss at Hulu was due to higher programming, marketing and labor costs, partially offset by growth in subscription and advertising revenue

In fairness, Disney and Hulu’s other owners have been disclosing that sentence for three years running now.

One other detail one can pull from the disclosures: a rough estimate of what Hulu might be worth as a business. Hulu was originally founded by Disney, Fox, and Comcast alone, each owning 33 percent of the venture. Time Warner then bought 10 percent of Hulu in August 2016 for $590 million. That implies a value of $5.9 billion at the time.

So what is Hulu worth today? That’s hard to say. First, Fox is selling its 30 percent stake to Disney as part of larger asset purchase deal. That means Disney will become Hulu’s majority owner with a 60 percent stake in the business. We’re still waiting on that deal to close sometime later this spring, and maybe we’ll get a better sense of the purchase price for this particular asset then.

Meanwhile, one of Hulu’s top executives said just this week that the business had double-digit subscriber growth in 2018 (growing fastest in the United States), and now has 25 million paying subscribers. The Hulu exec was upbeat about Disney owning a majority stake.

Then again, what else would you say when you’re a senior exec trying to keep your job?

So there we were, watching Season 2 of Shuteye on Hulu, when we realized: Disney and 21st Century Fox both own stakes in Hulu! If this sale of Fox assets to Disney goes through, Disney will own a controlling stake in Hulu!

What might that mean for Hulu’s valuation? What about Comcast and Time-Warner, the other owners? And how much money is Hulu making or losing these days, anyway?

Few people can know the full details, since Hulu is a private company. But all its owners are public companies — and yes, with some clever searching of the Calcbench data archives, you can find some answers.

First, let’s review Hulu’s ownership structure. As we noted in a post from 2016, Hulu originally had three owners, each with a 33 percent stake: Disney, Comcast, and Fox. Time-Warner bought into the operation in August 2016, acquiring a 10 percent stake and diluting all everyone else’s holdings to 30 percent.

So if the Fox sale goes through, Disney will own a 60 percent stake in Hulu. That has strategic implications galore which we’ll revisit further down. Now let’s try to get a fresh look at Hulu’s financial operations.

The simplest way to do that is to create a peer group of Hulu’s four owners, and then search their footnote disclosures for “Hulu.” Then the nuggets start to shake loose…

We Know Hulu Loses LOTS of Money

In its fiscal 2017 earnings report, filed on Aug. 9, Fox reported losses of $379 million from “other equity affiliates,” of which Hulu is one. That amount is lower than than the $417 million reported for fiscal 2016, but several businesses are lumped into “other equity affiliates” along with Hulu, so we’re not clear how much the performance of each one affected the total.

Fox did say, however, that the increase in losses “primarily reflects higher equity losses from Hulu…”

Along similar lines, Disney had an earnings statement on Aug. 8 that reported “equity income of investees” that fell 18 percent in second-quarter 2017 to $127 million. Where did that loss come from?

“Equity in the income of investees decreased due to a loss from our investment in BAMTech, which we acquired in August 2016 and January 2017, and higher losses from Hulu, partially offset by higher income at A +E Television Networks … The decrease at Hulu was due to higher marketing and labor costs, partially offset by higher subscription revenue.”

Comcast, however, gives us the really juicy stuff. From its annual report filed last Feb. 23: “In 2016, 2015 and 2014, we recognized our proportionate share of losses of $168 million, $106 million and $20 million, respectively, related to our investment in Hulu.”

Assuming Hulu lost money in equal increments from one month to the next (a big assumption, we know); and Comcast was responsible for 33 percent of the loss in the first seven months of 2016, and 30 percent for the remaining five months; that implies a total loss in 2016 of roughly $527 million.

Also, if Comcast recorded a $20 million loss in 2014, when it owned one-third of the company — that means Hulu’s losses went from $60 million to more than $500 million in only three years. Yikes.

We Know About the ‘Hulu Indemnity’

When Time-Warner bought into Hulu last year, Fox disclosed this item:

For a period of up to 36 months, under certain limited circumstances arising from regulatory review, the new investor may put its shares to Hulu or Hulu may call the shares from the new investor. If Hulu is required to fund the repurchase of shares from the new investor, the Company has agreed to make an additional capital contribution of up to approximately $300 million to Hulu.

Translation: if Time-Warner sells back its stake to Hulu, and Hulu has to buy those shares at a loss, Fox will offer up to $300 million to fund the purchase.

Circumstances relating to a regulatory review… like, say, a merger? Maybe one that leaves Disney as majority owner of Hulu, and therefore weakens the control that remaining shareholders have?

The above paragraph is speculation on our part. Nonetheless, the fact remains that if this sale proceeds, Disney will be majority owner of Hulu. That fits neatly into Disney’s other plans, such as starting one or more streaming services of its own, and pulling Disney content from Netflix. And the remaining two owners, Comcast and Time-Warner, will see their hold over Hulu diminish relative to Disney’s power.

We at Calcbench don’t know what this all means. Still, for financial analysts trying to find answers, there is data out there to help you ask better, more informed questions. We’re happy to help you find it.

Last summer we had a post examining the finances of Hulu—which is not a public company itself, but does have several publicly traded investors that disclose some details about Hulu.

For example, Comcast reported last July 27 that it had a 33 percent stake in Hulu, and recognized $65 million in losses from Hulu for the first half of 2016, compared to $24 million in the first half of 2015. Do the math, and that implies total annual losses at Hulu of $144 million in 2015 and (gulp) $390 million in 2016.

Comcast was one of the original three investors in Hulu, along with Disney and 21st Century Fox, at 33 percent each. Time Warner joined the crew last August, acquiring a 10 percent stake in Hulu and diluting everyone else’s holdings down to 30 percent each.

So, we wondered, what have they all been disclosing about Hulu lately? How might Calcbench users snoop around the footnote disclosures of public companies to glean more intel about this popular private one?

We started with our Interactive Disclosure page, generally the best place to find juicy details about filers and their holdings. All we had to do was create a peer group of the four companies that own Hulu; and then enter “Hulu” in the text search box on the far right side of the page.

The most insightful details came, as usual, from Comcast. In its first-quarter 2017 report, Comcast reported “our share of loss at Hulu” as $54 million. If Comcast owns 30 percent of Hulu, and that share brought it a $54 million loss, that means Hulu lost $180 million in the first three months of 2017.

For comparison, Comcast also notes that it recorded a $25 million loss in the year-earlier period—when the company owned 33 percent of Hulu, since Time Warner had yet to arrive. So that was a total loss of $75 million for Hulu in that quarter, which has since ballooned to $180 million this year.

OK, so all those operating losses… against how much revenue, exactly? Unclear. Comcast, Fox, and others only report the size of the loss itself, not anything about total revenue. Disney did say in its first-quarter report that operating losses “were due to higher content, marketing and labor costs, partially offset by higher advertising and subscription revenue.” We don’t know more than that, although we can assume that the star power and high production quality of The Handmaid’s Tale must have cost a fortune.

We do know that Hulu was valued at roughly $5.9 billion last summer, since Time-Warner purchased its 10 percent stake for $590 million. We also know that Hulu has a $338 million term loan due this coming October, for which Comcast, Fox, and Disney have guaranteed $113 million each. Still, none of that helps us understand how much revenue Hulu brings in annually, and how large those operating losses are relative to it.

The hints somewhat suggest that Hulu today is on the same growth path as Amazon.com in the late 1990s: revenue growing like weeds, but operating losses growing right along with it. And that’s just a guess; plenty of other companies grew like weeds in the 1990s, never made a dime of profit, and went belly up.

One final clue comes from Disney’s proxy statement, in the section listing executive compensation. There, the company says that Kevin Mayer, Disney’s chief strategy officer, received a performance bonus of $4.5 million last year. For what? “Managing the company’s strategic merger and acquisition and joint venture activity, particularly … to engage in developing models for distributing media” including investments in BAMTech, Vice Media—and Hulu.

We swear, this all started only because we picked up the latest earnings report from 21st Century Fox at random.

Little did we know, looking that quarterly filing would lead us to look at a raft of other filings, from some of the biggest names in the entertainment business—all to uncover the financial picture of yet another entertainment company, which reports no financial data at all: Hulu.

So if you want an example of how Calcbench can help you understand the financial health even of private businesses, read on.

We picked up the Fox quarterly report, submitted Aug. 10, and looked at the dashboard view. Near the top of the list of disclosures is “Commitment and Contingencies.” Hmmm, we thought, let’s look there—mostly to see whether the company had set aside cash to cover sexual harassment litigation against its former CEO, but contingencies are just a good place to find juicy financial details generally.

And then we saw it: a $115 million contingency named “the Hulu indemnity.” What was that?

As Note 15 went on to explain, Fox has guaranteed $115 million of a $338 million, five-year term loan Hulu took out several years ago. The note says the indemnity might come due two to three years from now, so we assume Hulu is halfway through the term. The fair value of the guarantee was determined by “Level 3” inputs, which is GAAP-speak for saying Fox has no hard, market-driven evidence to determine the value of the guarantee; Level 3 inputs come from model-driven estimates. Usually that esoteric method of determining value is harmless, although some investors in credit default swaps circa 2008 might beg to differ.

What really caught our eye, however, was the next paragraph in the note.

On Aug. 1, the note said, Hulu sold a 10 percent equity stake to a new investor. Previously Hulu had three owners: Fox, Disney, and Comcast, who each owned 33 percent of the company. Last week Hulu gave a 10 percent interest to Time Warner, which means Fox, Disney, and Comcast had their holdings diluted down to 30 percent each.

A hotshot entertainment startup like Hulu, owned by four other titans in the entertainment sector, also means that the Justice Department might start asking antitrust questions—and therefore, the note said, “under certain limited circumstances arising from regulatory review,” Time Warner also has the right to sell back its shares to Hulu for the next three years. If Hulu has to buy those shares at a loss, Fox has agreed to contribute as much as $300 million to cover the difference.

That was the Fox disclosure about its investment in Hulu. So we wondered, what do Comcast, Disney, and Time Warner have to say about all this?

Disney’s second-quarter filing arrived on Aug. 9. It, too, had news of the Time Warner investment in Hulu. Unlike Fox, Disney identified Time Warner as the new investor (which was old news on Wall Street by then anyway), and also said Time Warner had paid $583 million for its 10 percent stake—which implies that Hulu’s total valuation is $5.8 billion.

Also like Fox, Disney disclosed that it could be on the hook for a $300 million payment if the deal goes south and Hulu buys back the Time Warner shares at a loss. Disney had no mention of any loan guarantee like Fox.

We found more Hulu information tucked away in the Disney filing. In the Management Discussion & Analysis on Page 27, Disney says its equity income from investees (such as Hulu) dropped $58 million in the second quarter. Partly that’s due to the A&E network earning less profit, and partly it’s due to Hulu losing more money because of higher programming, marketing, and labor costs—although, Disney added, Hulu’s subscription and advertising revenue are up.

But how much of that $58 million drop is due to widening losses at Hulu, versus shrinking profits at A&E? We don’t know.

Comcast’s second-quarter report is where the data got much more interesting. Comcast filed its report on July 27, several days before Hulu announced the deal with Time-Warner—so we have no mention of that deal or the $300 million buyback guarantee that Comcast presumably made along with Fox and Disney. The company did, however, disclose that it recognized $65 million in losses from Hulu for the first half of 2016, up from $24 million in losses for the first half of 2015.

If we extrapolate those numbers (first multiply them by three to get total losses for the first half of the year, then double that number to arrive at full-year losses) that means Hulu lost $144 million in 2015, and is on pace to lose $390 million in 2016.

We can’t be sure that’s accurate; for all we know, Hulu is starting to rack up new subscription and advertising revenue to close the gap. But from what Hulu’s owners have disclosed so far, the numbers do suggest a classic technology startup—lots of growth, and lots of losses.

Time Warner filed its second-quarter report a few days after its investment, and only disclosed the deal as a subsequent event. So we’ll need to see how things get reported next quarter. Put this one on your watch list.