July 31 (Bloomberg) -- Walt Disney Co. Chief Executive Michael Eisner last year highlighted the benefits of a $2.4 billion contract that locked the company's networks into six years of National Basketball Association television rights.
That agreement made Disney's ESPN cable channel the only network to carry all four major North American sports leagues. Those same sports programming contracts at ESPN and Disney's ABC broadcast network have squeezed profit at the Burbank, California- based company because the cost of TV rights has grown twice as fast as sales.
Sports fees and a jump in labor expenses at theme parks will likely prompt Disney, the second-largest U.S. media company, to report later today that profit in the fiscal third quarter fell to 16 cents a share from 18 cents a year earlier, according to a Thomson Financial survey of analysts.
``They are in the front end right now of some big contracts with both basketball and football,'' said Brian Barish, president of Cambiar Investors, which manages $1.5 billion, including about 2.34 million Disney shares. ``In the front years, you might be losing money versus that contract. In the back years, you'll be quite profitable.''
Disney executives declined to be interviewed for this story, spokesman John Spelich said. He cited a company policy that bars executives from commenting on financial matters in the weeks before earnings are reported.
Eisner said in June about Disney's theme parks that ``the pace of bookings has improved notably since our last earnings call.'' There are ``encouraging trends at our parks.''
Disney shares rose 17 cents to $21.86 at 10:14 a.m. in New York
Stock Exchange composite trading. They had risen 33 percent this year on expectations that U.S. economic growth will accelerate, though they're still trading for half their 2000 peak of $43.63. The Standard & Poor's 500 has risen about 12 percent this year, and AOL Time Warner Inc., the largest media company, is up 16 percent.
Sports Costs
ESPN's operating expenses in the quarter will rise about 63 percent from a year earlier to $748 million, according to a research note by Deutsche Bank analyst Doug Mitchelson, who rates Disney shares ``buy.''
Disney is responding to rising sports costs by boosting by about 20 percent each year the fees it charges cable operators to carry ESPN. As a result, sales at ESPN, the highest-priced basic cable network, will rise 30 percent to $843 million, Mitchelson said.
ESPN's fee increases are likely to continue, analysts and investors said. Disney's fiscal 2004 sports costs -- for the National Football League in particular -- may decrease, bolstering results, they said. ESPN has said the basketball deal will be profitable over the life of the contract.
Revenue Increase
Disney's quarterly revenue is expected to rise to $6.1 billion from $5.8 billion a year earlier, according to Thomson estimates.
Along with sports costs, the 61-year-old Eisner, who was paid $6 million last year, must deal with higher expenses as attendance has slumped at its theme parks. The parks employ about 70 percent of Disney's workers.
The company has said increased spending on information systems, park upgrades, insurance and employee benefits has hurt profit at Disney World in Florida and Disneyland in California, dragging down second-quarter results to their lowest level since 1994. Disney doesn't disclose park attendance figures.
Park Attendance
``When attendance bounces back to peak levels, the operating costs won't go up at the same rate,'' said Brian Eisenbarth, a money manager at Davidson Investment Advisors, which owns about 600,000 Disney shares. ``The fixed operating costs at the theme parks are pretty substantial.''
Disney's 6.375 percent notes maturing in 2012 rose to $1,085 per $1,000 face value from $1,080, according to Trace, the bond- pricing system of the National Association of Securities Dealers.
One bright spot in the latest quarterly results may be Disney's film division.
Disney's flagship studio is ranked first in ticket sales this year with $966.2 million through Sunday in the U.S. and Canada. Its top movies during the quarter included the Steve Martin comedy ``Bringing Down the House,'' the teen drama ``Holes'' and the latest hit from Pixar Animation Studios, ``Finding Nemo.''
On Sunday, ``Nemo'' became the top-grossing animated film in North America with $313.1 million, passing Disney's 1994 hit ``The Lion King,'' which brought in $312.9 million domestically.
Pixar Contract
Eisenbarth and other investors said they're concerned the Pixar partnership, one of Disney's biggest moneymakers, is at risk.
Disney co-finances Pixar's productions, sharing costs and profit. It also charges a fee to market and distribute the movies, increasing its share of the profit. Pixar's first four films, which included hits such as ``Toy Story'' and ``Monsters, Inc.,'' contributed 40 percent to 50 percent of Walt Disney Studios' profit in recent years, according to Merrill Lynch analyst Jessica Reif Cohen, who rates Disney ``neutral.''
Pixar, which is free to sign a new distribution contract with another studio after delivering ``Nemo'' to Disney, has said it has held talks with other studios.
Eisner has said he's confident that Pixar will remain with Disney, though he has said that a new contract will have to offer more lucrative terms to Pixar. That will raise Disney's costs in yet another of its most profitable businesses.
``Pixar is going to want more money,'' Cambiar's Barish said. ``There's no question they're going to want more money and they're going to get more money.''
July 31, 2003 10:26 EDT
Source:
Bloomberg.com 
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