Welcome back to Dry Powder, I’m Bill Cohan.

After Disney broke out ESPN’s financial data for the first time on Wednesday, it’s now abundantly clear that ESPN is a “melting iceberg,” as one analyst put it. In today’s issue, I weigh in on the valuation debate surrounding the asset, and propose some strategic solutions that Bob Iger and Jimmy Pitaro might consider.

So what is the true value of a linear TV network that appears to have made $2.9 billion in operating income last year but that once upon a time made $4.4 billion? That’s the kind of question that investment bankers fantasize about as they imagine their millions in advisory fees. A few Wall Street research analysts have already proffered valuations of ESPN in the weeks leading up to Disney’s release of the segment data. Over at Wedbush Securities, the analysts valued ESPN at $50 billion, with the caveat that $50 billion might be the price that, say, Apple would pay for ESPN in a takeover. In other words, ESPN with a twist of takeover premium. (Not gonna happen.) Brandon Nispel, a research analyst at KeyBanc, took a more sober accounting, and pegged ESPN as worth $30 billion, or 7.8x an estimated $3.8 billion in EBITDA—way too high, it turns out. (“Though we do view it as a melting iceberg,” he said.) Our friend Rich Greenfield, at LightShed, put a value “closer to $20 billion” on ESPN, according to CNBC.

How does the $2.9 billion of 2022 operating income (excluding a nine-figure loss from Star India) compare to Nispel’s $3.8 billion EBITDA estimate? First, the $2.9 billion, according to Disney, is “operating income,” which most bankers usually think of as EBIT—earnings before interest and taxes—as opposed to EBITDA, which is earnings before interest, taxes, depreciation and amortization. Add back the $90 million of ESPN’s depreciation and amortization that Disney shared in the financial release, and you get to EBITDA in 2022 of $3 billion. Fair enough.

It turns out that Nispel was making the assumption that ESPN’s 2023 operating income would be much higher than it turned out to be. In a subsequent note to investors after Disney released the actual ESPN numbers, Nispel backed off his $30 billion valuation from a month earlier. “We think [the new data] reflects negatively on our view on valuation for ESPN that we outlined in a previous note,” he wrote after seeing the actual numbers, citing lower operating margins than he anticipated and higher costs for the acquisition of sports broadcast rights, particularly for the NBA.

So what’s a business worth that made $3 billion in EBITDA last fiscal year? Is $30 billion—Nispel’s number, or 10x EBITDA—too high a valuation for a declining linear TV business? Or is Greenfield right, and ESPN is worth only around $20 billion? I seriously doubt that either a private-market buyer or the public markets, if ESPN were to be loaded up with debt and floated off as a public company, would place that high a multiple on a business that has EBIT margins declining to 15.7 percent in 2022, from 16.8 percent in 2021.

Is 10x too high a multiple of EBITDA for such a business? It’s tough to answer that question without looking at precisely how ESPN performed this fiscal year, which ended September 30. (Disney won’t report the final quarter—July, August, September—until November 8.) In the meantime, we now have numbers for the first nine months of fiscal 2023, ending July 1. Excluding the big losses at Star India for the first nine months of fiscal 2023, ESPN produced EBITDA of $1.94 billion, or a run-rate of about $650 million a quarter.

To be kind, since we know that it’s been a bit of roller-coaster so far this fiscal year, including an EBITDA loss of about $30 million for ESPN in the first quarter of 2023, let’s stipulate that ESPN made another $650 million of EBITDA in the final quarter of fiscal 2023, ended September 30. That would put the ESPN EBITDA for the year at $2.6 billion, or $400 million less than the $3 billion that ESPN made in fiscal 2022, according to my calculations. (Again, we will have to wait until November 8 to know for sure.) That’s a 13.3 percent decrease year over year.

What would you pay for a business with shrinking margins that declined $400 million in EBITDA year-over-year, and one that once made $4.4 billion? Now, the calculus is getting really complicated. Will the downward trend continue? Or will my friend Jimmy Pitaro, ESPN’s extremely smart and well-liked C.E.O., start turning the battleship around?

First, the cost of the live sports rights it depends upon are rising, as Nispel mentioned in his latest report, especially as the Apples and Amazons of the world enter the bidding market. ESPN has already committed some $45 billion to this endeavor through 2027, nothing to sneeze at. Second, ESPN also faces the death-defying problem of trying to convince cord-cutters to sign up for a revamped digital ESPN at some unknown price, at some unknown time. (Reports have suggested the package could cost anywhere from $20 to $35 a month and to start hitting the market next year.) All of which more or less adds up to the fact that $2.6 billion in 2023 EBITDA may end up being the high-water mark for ESPN. It still might be downhill from here.

Could Pitaro improve operating margins and convince millions to pay up for a digital ESPN while the cord-cutting slows? I suppose he could, yes. But, talented as he may be, that would require an extraordinary degree of finesse. I’m sticking with the $25 billion valuation for ESPN. And that’s generous.

How would Jimmy feel about this? On the one hand, he could be C.E.O. of an independent ESPN. On the other hand, he won’t like having $20 billion of debt to service, even though he should comfortably have the cash flow to do so. But, Jimmy’s feelings aside, this would be a great move for Disney: it would get rid of $20 billion of debt, reducing Disney’s net debt to around $16 billion, and would relieve Iger (and Nelson Peltz et al.) of catching the dual falling knives of ameliorating cord-cutting and shifting customers to streaming. I like this idea but doubt Iger will go for it, unless, of course, The Smiling Crocodile forces his hand.

I have also espoused the idea before of selling ESPN to Comcast as part of Disney’s acquisition of the final third of Hulu, but I doubt that Iger, who genuinely loves ESPN, will see it as a bargaining chip. That, to me, is a mistake. This is a big opportunity for Iger to show Wall Street, and his long-suffering shareholders, that he is willing to be forthright and creative about what’s going on at ESPN and what’s likely to continue to go on into the future. While it’s true, as Wells Fargo research analyst Steven Cahall wrote after the ESPN numbers came out, that “There’s perhaps more durability in ESPN’s top-line [revenue] growth than expected,” there is no ignoring the 13 percent year-over-year decline in the EBITDA line. That’s where the rubber meets the road in this situation.

I, for one, am not particularly optimistic that a turnaround can be engineered in the short term, as determined as Pitaro may be. (As you can tell, I like Jimmy and wish him well.) That’s why Iger needs to get creative, fall out of love with live sports, and return to focusing on what’s really important at Disney: its filmed entertainment businesses, its theme parks business, and its streaming businesses. The best answer at the moment, as I’ve become increasingly convinced, is for Disney to preserve its cash, use ESPN to buy the one-third stake in Hulu it doesn’t already own, and send Jimmy off to Comcast and let the smart folks in Philadelphia solve the ESPN problem, just like they’ve solved pretty much every other problem they’ve faced lately.