Eisner Foes Say Disney Hid Fallen Value of ABC Family

Sharpening their attack on Walt Disney Co. and its chief executive, former directors Roy E. Disney and Stanley P. Gold have accused the company of concealing from shareholders the diminished value of one of its key cable channels.

But outside experts say the Burbank conglomerate seems to be operating within the scope of federal accounting rules, despite questions that for weeks have been swirling around the finances of the ailing ABC Family Channel.

In a letter to the board, Gold and Disney cited an internal financial analysis of ABC Family Channel that concluded it was worth as little as $1.2 billion. Disney purchased the channel and other related assets in 2001 for more than $5 billion.

“The stark reality of this investment must not be hidden from shareholders,” Disney and Gold said in their four-page letter, which was sent two weeks ago, according to sources familiar with its content. “You must carefully consider the propriety of failing to write down this significant investment.”

For several months, Wall Street analysts and others have debated whether Disney should account for the fallen value of ABC Family. Under federal accounting rules, companies may be forced to write down a portion of the difference between the purchase price of an asset and its current market value. That requirement led Time Warner Inc. and Vivendi Universal to take major charges against their earnings in recent years.

In the view of some experts, however, Disney may not have to take a write-down. Companies generally do not have to write down a so-called underwater asset if it is included within a broader group that has appreciated in value, said Lisa Munro of the Financial Accounting Standards Board, whose rules are enforced by the Securities and Exchange Commission.

ABC Family, for its part, is under an umbrella cable group that includes powerhouse ESPN as well as the profitable Disney Channel.

“From my limited knowledge of Disney’s accounting,” Munro said, “nothing jumps out at me.”

Gold and Roy Disney declined to comment on their latest challenge to Disney’s management.

Company executives also declined to comment. But they previously have maintained that no write-down for ABC Family was required. They also have publicly acknowledged that they paid too much for the channel.

“I hate to state the obvious, but if the company believes it should take a write-down, it would obviously take a write-down,” Chief Financial Officer Tom Staggs said at an investor conference this year. “We’ve got quite a valuable asset there. It’s taking somewhat longer than we hoped initially to get it where we think it should be.”

The letter from Gold and Disney was sent to the board late last month before its annual retreat, apparently timed to keep the heat on CEO Michael Eisner. This week, the two men vowed to nominate an alternative slate of directors next year if the board failed to move decisively to improve the company’s financial performance and find a successor to Eisner.

Gold and Disney, the nephew of company founder Walt Disney, were the driving force behind the shareholder revolt in March that culminated in a 45% vote of no confidence against Eisner. The board stripped Eisner of the chairmanship but allowed him to remain as chief executive, a job he has held for nearly 20 years.

A massive write-down on ABC Family would play into the hands of Eisner’s critics, who have picked apart his strategic decisions. In addition, it could effectively wipe out the company’s bottom line in a potentially make-or-break year for the Disney leader.

Disney, which is enjoying a modest recovery in its theme parks, has promised a 40% increase in income from continued operations this year and is expected to report strong second-quarter results May 12.

Disney bought the former Fox Family Channel in a $5.2-billion deal with News Corp. and Saban Entertainment. The acquisition included children’s channels in 73 other countries and a 6,500-episode TV library featuring Saban’s “Mighty Morphin Power Rangers.”

One of the primary rationales for the acquisition was to give Disney another cable outlet to recycle shows from its ABC TV network. But the strategy never worked. Lacking a clear identity, the channel’s ratings and operating income tumbled.

In their letter, Roy Disney and Gold also called on the board to examine the need for possible write-downs of the company’s investments in MovieBeam, the company’s new movie-on-demand service, and its struggling Euro Disney unit.

Euro Disney, which runs the Disneyland Paris resort, has been given until the end of the month by creditors to devise a plan to restructure its debt.