If there is one positive from Covid-19 is that Hollywood, which US Attorney General William Barr has rightfully characterized as a pawn of the Chinese Communist Party, will suffer an unprecedented financial catastrophe – the likes it has never seen before.
It is a matter of opinion whether this is Divine justice towards an entity which has corrupted not only the American public but the world at large with a hypocrisy, racial stereotypes and filth for generations.
To give you the size of the financial impact, consider no other than the epicenter of Hollywood, and the source of the problem – Walt Disney.
Walt Disney entered 2020 as a media behemoth – having acquired 21st Century Fox in 2019 for a total of $85.1 billion, including equity and debt. As a result, as of end Mar 2020, Walt Disney had total debt of $55.5B with liquid cash at $14.4B, for net debt of approximately $40B.
On the surface, this seems manageable as Walt Disney’s 2019 Full year revenues were $69.1B and operating cash flows of $5.9B, more than enough to cover interest expense of $1.2B.
However, thanks to the Covid-19 pandemic, unleashed by their CCP masters, Walt Disney will see a hit the like it has never seen in its history. Parks, Experiences and Products, which grossed sales of $26.2B in revenues 2019, with operating income contribution of $6.7B is going to near zero. Studio Entertainment, which had total revenues of $11.1B will see a massive hit to its Theatrical distribution business which contributed $4.8B in revenues. Together, Walt Disney will see a hit in the second half of the year of the order of $10 – $15B in revenues, which should hopefully see it swing to a massive loss. Its net income for the quarter ended Mar 31, 2020 was $475M, down from $5.4B a year earlier.
The key thing about both segments is its relatively high fixed costs. Property, plant and equipment depreciate – regardless of whether the parks are open or not. Media executives need to be paid and long term supply contracts for merchandise (made in China of course) need to be honoured.
However, what will really take the cake is a collapse of Disney’s credit rating, which currently stands at A-. So long as Disney’s credit rating collapses, then its borrowing cost would increase, subject to a Fed bailout. Perhaps a loss of the size of $10 to $15B this year should bring Disney’s credit rating down to BBB-. As Covid-19 shows no signs of abating, the earliest projections of any normalization, if there ever will be, looks somewhere in 2021 at the earliest. With $12B of loans due this year, a bump up in the financing costs will be a fitting present to this entity.
That is of course provided Covid-19 does not wipe out humanity in the process. If it does not, we strongly urge Walt Disney to release a new sequel to Mulan extolling the virtues of the Chinese Communist Party, and how wise and far-sighted they are and how they have made the world a better place. Or spend $20B and acquire TikTok – we don’t really care either way.