Corporate Finance

Managing Mickey’s Money

Disney's Nanula has his hands full restoring investor confidence.
Ronald FinkNovember 1, 1997

Remember the scene in fantasia in which Mickey Mouse dons the sorcerer’s hat, takes up his magic wand, and then struggles to contain the damage from the forces unleashed? That’s the way Richard Nanula must feel some days. After all, since resuming his finance duties in February 1996 (after a brief hiatus), the 37- year-old chief financial officer of The Walt Disney Co., in Burbank, California, has faced down one nightmare only to have another one pop up.

Consider this string of events: Hollywood superagent Michael Ovitz makes a supercostly departure after serving a supershort stint as Disney’s president. Prime-time ratings plummet amid management turmoil at newly acquired ABC. Hackles arise over Nanula’s accounting for the acquisition. The company’s latest animated blockbuster, Hercules, disappoints at the box office. Finally, Wall Street analysts cut their fiscal 1998 earnings estimates.

After years of stellar performance, Disney’s stock badly trails the Standard & Poor’s 500 this year, even after a recent upturn (see chart, page 33). Robert Olstein, who runs the $215 million (in assets) Olstein Financial Alert Fund, in Purchase, New York, gave up on Disney a year ago, unloading more than 40,000 shares. “They wrote off a lot of programming assets,” says Olstein, and that told him the company was on the verge of “a period of stagnation.”

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A less talented and committed CFO than Nanula might wish he hadn’t gotten his old job back from Stephen Bollenbach.

In fact, a few months before Bollenbach joined Disney from Marriott in April 1995, Nanula doffed the CFO hat, which he had worn since August 1991, and replaced it with that of president of The Disney Store Worldwide. Yet Nanula, one of the very few black CFOs at major U.S. companies, insists that he did not feel shunted aside to make room for Bollenbach. He notes that chairman and CEO Michael Eisner had long wanted him to gain operating experience.

Says Eisner: “I always thought it would be good for everybody to have some operating experience, and this was an opportunity for him to have it. He would have wished, and I would have wished, that it had gone on a little longer. It was short, but we needed him back at corporate.”

Most observers accept that characterization of the situation. Sure, adds Alan Schwartz, executive vice president and head of investment banking for Bear, Stearns & Co., “there was not a lot of precedent for it,” notwithstanding official statements to the contrary. And the consumer products division, of which the Disney stores form the biggest part, is not a big contributor to the company’s revenues. But, says Schwartz, “the stores are an interesting place to gain operating experience, because they’re one of the areas that’s going to produce the synergies” that Disney is looking for between animation and follow-on sales. Indeed, after TV and radio stations, the consumer-products division currently boasts the widest profit margin among all of Disney’s businesses (see chart, page 34).

But some believe Nanula was less pleased than he claims to have been about the move. He certainly had reason to be irked. Both Nanula and Bollenbach had worked for financial wizard Gary Wilson, the chairman of Northwest Airlines Corp., Disney board member, and former CFO of both Disney and Marriott. As Eisner puts it, Nanula was “trained by a brilliant professor,” and is “on track” to surpass him.

But Bollenbach was better known for his bold use of leverage in various high-profile deals. And while many analysts say Nanula is no less talented, a source close to Nanula, who asked not to be identified, says Eisner brought in Bollenbach to impress analysts after the loss of the highly regarded Frank Wells, the former Disney president who died in a plane crash in April 1994. “Michael needed a name to satisfy Wall Street,” says the source.

Eisner vigorously denies this. “It’s completely fallacious,” he says, adding, “This is the first time I’ve heard it.”

Regardless of Eisner’s motivation, Nanula’s move to the Disney stores “looked to the outside world like a demotion for Richard,” says the source. Bollenbach promptly won credit for wrapping the Capital Cities/ABC Inc. deal, which added more than $9 billion in debt to Disney’s theretofore pristine balance sheet, even though Nanula had been working on the deal long before Bollenbach’s arrival.

“Everyone makes a big deal about Bollenbach closing ABC, but all it took was a phone call,” says the anonymous source. (Nanula declined to comment about his successor’s role in the deal, and a spokesman for Bollenbach declined a request for an interview.) Over at the Disney stores, meanwhile, “Richard had to wonder if he’d ever get back to corporate,” says the source.

As it turned out, Nanula did not have to wait long. When Bollenbach left in early 1996 to take over the reins of Hilton Hotels Corp., Eisner immediately turned the CFO duties back to Nanula. And he now identifies him among several senior executives he calls his “Number Two.” Wall Street is also quick to shower Nanula with praise.

Nanula does display some pique toward the news media, accusing them during an interview in his wood-paneled office at the company’s headquarters of dwelling inordinately on Disney’s mistakes and on threats, real or imagined, to Disney’s franchise.

Moreover, Nanula contends, the press is ignoring a string of positive developments, such as booming attendance at Disney’s park outside Tokyo (though it has fallen off a bit in recent months); four consecutive record years at Walt Disney World in Orlando; last summer’s surprise live-action hit, George of the Jungle; and indications that corporate earnings growth for the current fiscal year (which ended on September 30) will beat the company’s 20 percent objective by more than five percentage points despite the challenges facing Disney. “Nobody wants to write about that,” Nanula says. “It’s not fun to do.”

Not that Nanula is uncomfortable in the role of troubleshooter. Take Euro Disney (now known as Disneyland Paris), the theme park in France. Nanula was instrumental in efforts in 1994 to make sure the park’s financial problems didn’t hurt Disney itself. Besides restructuring Euro Disney’s debt, Nanula reduced Disney’s exposure to the venture from a 49 percent stake to 39 percent by selling off 75 million Euro Disney shares for $145 million to Prince Alwaleed bin Talal bin Abdulaziz Al Saud of Saudi Arabia.

And Nanula is undaunted by a string of bad news: “In a $50 billion­plus [in market value] company operating in nearly 200 countries, with all the transactions we do around the world, and with one hundred and something thousand employees, there are going to be a bunch of mistakes that we make every year. Hopefully, we’ll react to them well.”

In any case, he says, expectations for continued growth require Disney “to be out there taking chances.” As for Wall Street, he points out that even those analysts who have cut their estimates for fiscal 1998 maintain long-term buys on the stock. Near term, he concedes, Disney investors face uncertainty, particularly over ABC’s ratings. He also agrees with analysts that Disney will have to spend heavily to retain the rights to NFL broadcasts on its ESPN cable network, and that it faces challenges in animation and theme parks from such outfits as DreamWorks SKG, News Corp., and Time Warner.

But Nanula insists those problems pose little cause for concern. “It gets harder every year,” he concedes. “But everybody’s job gets harder.” Analysts and reporters who believe Disney can’t make its target, he contends, fail to appreciate the cash flow that Disney generates. Indeed, earnings before interest, taxes, depreciation, and amortization (EBITDA) exceed Disney’s interest by almost six times, compared with interest coverage of less than three times EBITDA for News Corp. and less than one time for Time Warner. “Our balance sheet is much stronger than anybody else’s,” he boasts. Equally important, says Nanula, the skeptics fail to appreciate that Disney has ample opportunity to increase its cash flow, thanks to the strength of its brands.


Here Nanula is getting through to at least some on Wall Street. “We believe the single most important source of hidden value in the [Disney] story is the strength and depth of its brands,” Laura Martin, an analyst for Credit Suisse First Boston, wrote in a recent report. Despite what she calls “a library of some of the most recognizable brands on earth,” Martin notes that the stock trades at a multiple of earnings that is eight points lower than an average of other companies with strong global consumer-brand franchises.

By any method of brand valuation, many analysts agree, Disney’s brands do not get the credit from investors that they deserve. “The multiples look expensive compared with other media companies, but look at the multiples versus growth companies with consumer-branded products,” says Stewart Halpern, principal and senior entertainment analyst at Furman Selz LLC.

Eisner himself is expected to address the importance of Disney’s brand in a speech for an upcoming industry conference. But, he says, “I’m not looking for some outrageous, ridiculous multiple that blows in the wind or gets battered by changes in the economy. I hope people like the company. But I don’t want to promise them Nirvana. We are more than a media company. We are a consumer-products company. And Richard is very articulate in communicating to the investment community what we are. I’ve never seen anyone better. I just won’t let him become a snake-oil salesman.”

Nanula says Disney itself doesn’t try to calculate the value of its brand, because none of the methodologies used by analysts have become a generally accepted standard. “I don’t know how to value a brand,” he says. But he is acutely aware of the importance of Disney’s. “Our brand is in 50 or more categories, compared with 1 for Coca-Cola,” he says. “What we spend more time doing is figuring out how to profitably expand it,” he says.

Can Nanula help Eisner do that? “Absolutely,” says Steven Schoch, a former Disney finance executive under Nanula and now treasurer of The Times Mirror Co., in Los Angeles. “Richard is terrific,” says Schoch. “He looks to financing and the finance function in a more strategic way” than most CFOs.


That’s evident, says Schoch, in Disney’s cutting-edge approach to film financing. In deal after deal since Nanula’s arrival in 1986 as a planner under Wilson, Disney has sought and won financing arrangements that spread the risk in hit-or-miss film production and distribution across a wide array of projects, and that shift a good part of that risk to other parties.

Indeed, film financing is where Nanula shows signs of true sorcery. Wilson pioneered the approach of packaging several film projects into one and then selling off equity stakes in the package to limited partners. Selling this approach to Wall Street was no mean feat, says Ted Philip, a former finance executive under both Nanula and Bollenbach and now chief operating officer and CFO of Lycos Inc., an Internet company in Boston. “In several cases, Richard was able to get investment banking firms to step up to deals that they wouldn’t have done for anyone else,” says Philip. Schwartz agrees: “Richard built up tremendous credibility with the Street and understands what different pockets of investors want.”

As treasurer, following Wilson’s departure, Nanula came up with a new version of the partnerships, called Touchwood. (Congress had wiped out the tax advantages of the original partnerships.) Equity in this deal was sold to Japanese investors, who of course were beyond the reach of the U.S. tax laws. The Touchwood deal raised roughly $600 million for Disney, off-balance-sheet, in 1990.

With Japanese money running dry, Nanula sought a broader investment base for buyers of packaged film deals. So he came up with a new, indexed security, called senior participating notes, that appealed to U.S. and European investors. These guaranteed investors a minimum amount of interest for their five-to- seven-year terms. And when the films the money backed generated a minimum amount of revenue, the investors also got a piece of that, up to a certain maximum.

Wall Street had never before seen an indexed security used in connection with a specific business. “No one else really did this,” notes Schwartz of Bear, Stearns. “The film notes were created out of whole cloth.” But between 1992 and 1995, Disney raised about $1.3 billion through them. Unlike the partnerships, the notes were included on Disney’s balance sheet. But the notes also spread the risk of film production across a group of projects and shifted some of the risk to investors in return for their capital.

More recently, Nanula is credited with issuing the largest global corporate bond offering in history, when he rolled over $2.6 billion of the $9 billion in commercial paper that Disney issued in 1996 to finance the Cap Cities/ABC deal.

No wonder Disney’s borrowing costs are closer to those of an issuer that gets a AA rating from Standard & Poor’s than to those of one assigned a single A. The company currently pays 30 to 35 basis points over the rate on Treasuries for 5-year debt, compared with at least 5 points more for other A-rated firms, and 45 to 50 basis points over Treasuries for 10-year debt, compared with at least 5 points more for its A-rated peers.

Granted, some of that has nothing to do with Nanula’s skills. “People like to do business with Disney for reasons other than return on investment,” says David Davis, a partner in investment banking firm Houlihan Lokey Howard & Zukin, in Los Angeles. “It’s a vanity thing.”

But Jessica Reif Cohen, a managing director at Merrill Lynch, says Nanula has been “brilliant” in exploiting that advantage. Consider, for example, Disney’s 100-year-bond offering, which raised $300 million in 1993. The first of its kind in decades, the bond locked in rates for a century that were less than 1 percentage point higher than those on 30-year Treasuries. Only a company with the reputation of Disney could pull off such a financing, say analysts.


Reif Cohen also pays tribute to Nanula by noting that Disney has never overpaid for its acquisitions, with the possible exception of ABC. And the final terms of that deal were more Bollenbach’s doing than Nanula’s. Others agree that Nanula drives a hard bargain. “Richard is very tough in dealing with Wall Street and the banks,” notes Barry Sternlicht, president and CEO of Greenwich, Connecticut-based Starwood Capital Group. A close classmate of Nanula’s at Harvard Business School, Sternlicht sat across the bargaining table from him several years later as Nanula unwound a real estate deal that had helped keep Disney out of a corporate raider’s clutches. Nanula’s tough bargaining, says Sternlicht, “enhances value for shareholders.”

Did Disney overpay for Cap Cities/ABC? “There was probably no other price to pay,” says Nanula. “It was probably a choice of not doing [the deal] or paying that price.” Compare Cap Cities/ABC’s cash flow with the cost of the acquisition, and “I rate it a wash so far,” says Alan Kassan, an entertainment analyst at Deutsche Morgan Grenfell Inc., an investment firm in New York.

Nanula himself points out that Disney looked at CBS and MCA but didn’t pursue them as aggressively as did their eventual buyers, Westinghouse and Sony, respectively, because he found the asking prices too high. Tight fisted? You can say that again. “At certain levels, it doesn’t make sense to spend any more than X on any movie,” he says.

And while much of Hollywood is plagued by cost overruns, Nanula is quick to point out that Disney is not. “Our movies tend to come in at or near their budgets. You don’t see us making $150 million to $200 million movies that have big write-offs,” he notes. “We’re taking on less ambitious projects than things like the Waterworlds and the Titanics.”

Nanula is also cautious about expectations for revenues. “It doesn’t work out all the time, but if you’re doing a good job and things tend to work out, there should be a couple of hits to offset a few misses and the stuff in the middle.” For example, he says he expected George of the Jungle to generate half of the $100 million in box-office revenue that it has produced to date.

Sure, Disney has come in for criticism for stifling creativity with its formulaic bean- counting approach to filmmaking, and that, according to this view, explains why its last three animation releases haven’t been as successful as its all-time hit, The Lion King. Nanula has no patience for such complaints. “That’s like saying, ‘When are you going to win another Academy Award,’ or, ‘How come you haven’t won another Pulitzer?’ We like to think we let the creative process run pretty rampant within some reasonable financial box. Now, some people don’t like to be beholden to a budget. Some people would rather not have shareholders. They’re probably not here anymore.”


Some analysts worry that the challenges now confronting Nanula are of a different order than those he’s dealt with in the past. After all, ABC has made Disney a much bigger company, so the vagaries of film production don’t pose the threat to Disney’s earnings that they once did. Neither, for that matter, would continued problems at Euro Disney, even if Disney hadn’t reduced its stake in the venture.

Consider foreign theme parks, which Disney has great hopes for in the long term. “One day we should be pretty close to everywhere,” Nanula says. In riskier markets, however, he’ll probably use the Tokyo theme park instead of Euro Disney as the model. “It’ll be country by country,” he says.

In the Tokyo park, Disney has just a licensing arrangement. Sure, Disney gives up the chance to gain from any appreciation in the park’s value, but given Euro Disney’s travails, Nanula is happy enough to forgo that in return for limiting Disney’s downside. And the park helps solidify awareness of Disney’s brand in Japan, which helps market other Disney exports, including films and toys.

In this light, Euro Disney represents much less of a disaster than the press would have everyone believe. Take another look at those supposedly lousy box-office returns for last year’s Hunchback of Notre Dame. Granted, U.S. box-office returns were a paltry $100 million, less than a third of what The Lion King did in 1994. But Hunchback was a clear winner overseas, grossing twice as much there as in America. Would the film have done as well there absent Euro Disney’s presence? “I don’t think any of our movies would do as well if we didn’t have stores and parks,” says Nanula. “My guess is that if we had stores and parks in all the countries, you’d see the movies and the consumer products do even better.”

Clearly, Nanula is determined to exploit that potential. Last year’s private placement for financing film distribution overseas is as good an indication of that as any. The deal, another off-balance-sheet partnership, this one known as Mariner, raised only $200 million, but Davis of Houlihan Lokey contends that Disney has tapped a gold mine there. How so? “It’s a better economic model” than that now widely used by Disney and other companies for jointly distributing other studios’ films in the United States.

Consider a hypothetical blockbuster that Disney and another studio would distribute. If the film generated $200 million in box-office receipts in the United States, Disney and the other distributor would split the take 50­50. After likely marketing costs of $40 million apiece, each distributor would net $10 million, for a 25 percent return on its investment. Abroad, however, the movie could easily rake in $300 million. Since Disney has only a 40 percent stake in the Mariner partnership, its take on overseas distribution of the film would be $120 million. And after spending the $80 million on marketing that Davis expects would be necessary, Disney would net $40 million on the deal, for a 50 percent return. Not only would its return on the film be twice as high abroad as it was in the United States, but the fact that Disney’s stake is limited to less than 50 percent would keep the debt further off the balance sheet.

That kind of deal, says Davis, is an example of a financial strategy that is “extremely well crafted, thought-out, and managed.”

Nanula describes the deal as “a bit of an experiment,” and doesn’t expect the arrangement to be that much more profitable than Disney’s distribution efforts in the United States, which are now financed internally. “We hadn’t really gone out and spent a lot of money buying foreign rights to foreign distribution of foreign pictures. And we decided, as we do with a lot of things, the first time you go out of the box, you should have a partner and share your risk and reward. And, frankly, there was money that was willing to play along.”

Nor does he see anything particularly innovative about it. “It’s an application of the same film financing strategy that we’ve used on our overall film business.” In fact, he sees nothing particularly noteworthy about any of the deals he’s done, including the film notes or partnerships that win Wall Street’s praise. “We’re constantly doing things like that,” he says. “Most often, they don’t get announced.”

Longtime acquaintances point out that Nanula isn’t as flashy as Wilson. Of course, Disney is also a very different company than it was in the mid-1980s, when so much of its equity was tied up in theme parks and hotel properties. “Gary saw that all those assets were financeable,” says Alan Schwartz, an investment banker for Disney, so the focus of Nanula’s predecessor on leveraged deals was the “appropriate thing to do at the time.” But now the challenges at Disney are different, and Richard can’t “just be a financing guy,” says Schwartz. His involvement in recent management changes at ABC, for example, “is personally what Richard is about,” he adds. Like Wilson, says the banker, Nanula “has Michael’s ear.”

There is, however, such a thing as being overly risk-averse. One acquaintance, who asked not to be identified, notes that Nanula would probably have driven a harder bargain than Bollenbach did in buying Cap Cities/ABC. “Then again,” says the source, “the deal might not have gotten done.”

Eisner disagrees. “I think Steve did an excellent job in helping to culminate that deal, as I think Richard would have done,” he says. “I think the outcome would have been exactly the same.”

Given ABC’s problems, Nanula might prefer if the outcome had been different. But he puts a positive spin on the situation. “The ABC network itself is probably less than 5 percent of the income of the company,” he notes. “Yet it probably has a perception value that’s many times that.” And Nanula points out that he has taken advantage of the misperception. When the stock fell earlier this year with ABC’s ratings, Nanula bought back roughly 8 million shares at $57. It’s now around $87. So any trouble at ABC, he says, “is an opportunity for me.” And so believe some analysts. “There’s nothing wrong with ABC that one or two hits wouldn’t fix,” says James Goss, a media and entertainment analyst in Chicago. Nevertheless, Disney recently moved a close ally of Nanula’s, Peter Murphy, from Disney’s finance department to the CFO spot at ABC.

Maybe Nanula shouldn’t be likened to the sorcerer’s apprentice after all. Maybe the Disney character that comes closest to the CFO is the sorcerer himself, whose wizardry brings order to the big numbers and multiple elements of the Magic Kingdom.