Mickey Mouse, meet Bart Simpson.
That’s one example of the character match-ups that Walt Disney Co. is getting in a deal with 21st Century Fox to buy the company’s entertainment assets.
Industry observers and analysts who follow Disney said that it is the content – feature films and television shows – that the Burbank entertainment and media giant was after in the $66 billion transaction that includes taking on $13.7 billion in Fox debt.
Disney is paying for the film and television studios, the regional sports networks, cable entertainment networks including FX, its 30 percent stake in streaming service Hulu, and the international assets in the United Kingdom, India and Europe.
A leaner Fox keeps its news and national sports holdings, in addition to the broadcast network and its owned and operated affiliate stations.
With all the content from Fox, Disney becomes that much more of a challenger to streaming service Netflix Inc., in Los Gatos.
“Competition for Netflix got much, much more serious with the announcement of this deal,” said Michael Pachter, a managing director in equity research with Wedbush Securities Inc., in Los Angeles.
David Bonrouhi, managing director of Calabasas Capital, an merger and acquisition advisory firm in Calabasas, said it was unknown at this point who among the Fox senior-level management in charge of television and film production will stay once the deal is finalized.
“Disney is the acquirer here, so if there is senior management leaving it will probably come from the Fox side,” Bonrouhi added.
The acquisition is expected to yield at least $2 billion in cost savings from efficiencies realized through the combination of businesses, Disney said.
Bonrouhi said that to him that means there are back office layoffs coming.
“In certain divisions you may have some people that are highly specialized in their specific area,” he explained. “Certain groups within Fox may be stronger than a certain operational group within Disney. Generally speaking, it is the buyer’s operations that prevail.”
Word began to spread in early November that Disney had been in talks with 21st Century Fox to buy its entertainment assets although at that time negotiations were not ongoing. Media reports also named Comcast Corp., which owns NBCUniversal in Universal City, as a potential buyer for Fox’s media assets.
21st Century Fox was created in 2013 after being spun off from News Corp., the company controlled by billionaire Rupert Murdoch.
On Dec. 14, the deal was announced and set off a flurry of speculation of what it meant for the two companies and the entertainment industry.
Disney Chief Executive Robert Iger said the acquisition from Fox reflects increased consumer demand for a diversity of entertainment experiences.
“We’re honored and grateful that Rupert Murdoch has entrusted us with the future of businesses he spent a lifetime building, and we’re excited about this extraordinary opportunity to significantly increase our portfolio of well-loved franchises and branded content to greatly enhance our growing direct-to-consumer offerings,” Iger said in a prepared statement.
Iger, who was going to step down as head of Disney in 2019, agreed to stay on until 2021 because of the Fox deal.
Pachter believes the movie business would not be impacted by a combination of Disney and Fox.
“The TV business could be but honestly with Amazon and Netflix out there and AMC, Lionsgate and CBS bidding for content I don’t think it matters there is that much concentration with Disney,” he added.
Neil Macker, an analyst with Morningstar Inc., in Chicago, who follows Disney, said in a research note on Dec. 15, that he was surprised by the deal because he thought Murdoch was interested “in finishing the construction of his media empire, not tearing it down.”
By selling off the television studio, the Fox broadcast network would need to be open to buying programming but would not benefit from the longer tail of hit shows, Macker said in the note.
“Given the smaller size of the remaining company with the projected net debt of $7.5 billion, the Murdochs could either take the stub company private or merge it with News Corp.,” Macker wrote.
Monetizing content
The storied 20th Century Fox Film Corp. was founded in 1935 as the result of merger between Twentieth Century Pictures and a financially strapped Fox Films. Over the years, the fortunes of the studio ebbed and flowed. In 1977, it released “Star Wars” and would follow with five more films in that franchise, which are owned by Disney after its acquisition of LucasFilm Ltd. in 2012 for $4 billion. Fox retained the theatrical and home distribution rights to six “Star Wars” films.
In addition, to “Star Wars,” Fox has also released “Avatar,” the highest grossing film of all time; the six films in the “X-Men” franchise, and its spinoffs, “The Wolverine” and “Logan;” and “Deadpool.” Its television shows include “The Simpsons,” “Family Guy,” “Futurama,” “New Girl” and “American Horror Story.”
Tuna Amobi, senior analyst with CFRA Research in New York, said considering the reach of the Disney empire, Fox franchises could get a new lease on life under the new ownership.
With the Pixar and Marvel properties as the gold standard, Disney has an excellent track record of showing how franchises can be monetized, Amobi said.
“They have more consumer touchpoints with the theme parks and licensing,” he added.
Pachter, of Wedbush, said that where the Fox programs and films will be of most value to Disney is in the streaming services it is expected to start in the new year.
Disney will begin offering this year an ESPN-branded multi-sport video streaming service and in 2019 will offer one that will include its feature films.
“It is much more valuable if they get all the local baseball, basketball and hockey contracts,” he added.
The 22 regional networks own the local rights for 15 of the 30 Major League Baseball teams, 17 of 30 NBA teams, and 12 of the 24 National Hockey League teams. Disney already has national rights to NBA, MLB, NFL, college football and basketball.
A wrinkle in Disney’s plans for a standalone streaming service, however, is Hulu, the subscription on-demand service that is a joint venture between Fox, Disney, Comcast Corp. and Time Warner Inc., Pachter said.
Disney will own 60 percent of the service after its deal with Fox closes.
What Disney should do is jumpstart its subscriber base by converting Hulu into its own branded streaming service. The company could keep the price the same and share the profits with Comcast and Time Warner, Pachter said.
“The other Hulu owners wouldn’t complain if Disney started putting more content on Hulu,” he added.
Then, down the line, Disney could buy out the remaining joint venture partners and raise the price, Pachter said, adding, “It really could become a powerhouse that I think is competitive with Netflix.”
Bonrouhi, of Calabasas Capital, called Hulu Disney’s “big growth opportunity.”
“They need more content even if it means more diversified content, such as the edgy programming of Fox,” Bonrouhi added.
Timing the deal
Macker, of Morningstar, said in his research note that Disney and Fox executives expect the deal to close in 12 to 18 months. Macker pegged it at the latter timeframe.
But Pachter thinks the companies may want to try to close the deal prior to the mid-term elections in November while there is still a Republican Congress that is friendly to Murdoch. A Democratic majority in the House and Senate may look at the Disney-Fox deal as anti-competitive, Pachter said.
“Frankly I don’t think this is anti-competitive, but they want to get this done with a friendly president and Republicans controlling Congress who like Rupert Murdoch rather than hostile Democrats,” he added.
Macker did point out in his research note that the combination of Disney’s ESPN with the Fox regional sports networks could send up red flags with the U.S. Department of Justice, who will review the deal.
“The Department of Justice could use this combination of local and national sports rights to force Disney to sell the (regional networks) or exclude them from the deal,” Macker put in his note.
Disney is paying for the transaction with its stock by giving Fox shareholders 0.2745 Disney shares for each 21st Century Fox share, for a total of approximately $52.4 billion in stock.
Disney’s share price initially leapt nearly $3 at the announcement of the deal from $107.61 to $110.57 before closing at $112.28 on Jan. 3.
