A report from RBC Capital Markets last week suggested that Apple Inc. (NASDAQ:AAPL) could acquire Walt Disney Co (NYSE:DIS). Analyst Amit Daryanani said that multiple investors had asked him about the possibility of a merger between Apple and Disney, arguing that there was a non-zero possibility of such a deal occurring.
A combination of AAPL and Disney stock would be the largest merger in history — and in RBC’s estimation, a strong positive for Apple stock.
The idea has been greeted with almost universal skepticism, and the report had little, if any, impact on trading in Apple shares. Indeed, the merger seems highly unlikely.
But it does appear that Apple, which traditionally has shunned major acquisitions, could be in the market for a bigger target. That target may not be Disney. But there’s reason to believe Apple has a major deal in its future.
What Would an Apple-Disney Merger Cost?
Disney has an enterprise value of about $196 billion at the moment. Apple likely would offer a roughly 40% premium for Disney stock. In that case, the acquisition would cost Apple about $267 billion, including assumption of debt.
That’s a huge price tag, obviously — but it’s not insurmountable. Apple could fund at least some of the purchase price with Apple stock. Apple already has about $226 billion in cash and securities as well. The one major problem is that most of the cash remains trapped overseas.
If the Trump administration can’t push through a repatriation holiday, the cash portion of a Disney acquisition could be tougher to fund.
Would Disney Benefit AAPL Stock?
The strategic value of such a deal for Apple and AAPL stock is more complicated. On its face, the addition of Disney’s content would provide a huge leg up to Apple’s services business — notably both Apple TV and Apple Music. Apple has been trying to put together a streaming TV package for years — only to fall behind Alphabet Inc’s (NASDAQ:GOOGL) YouTube, among others. Disney’s ABC and ESPN properties could form the beginning of a content package that could rival YouTube streaming, Hulu and other bundles.
The counterargument is that adding Disney could ruin Apple’s ambitions in TV. The whole point of providing a streaming platform is to be provider-agnostic, something that Apple is … but it wouldn’t be if it owned Disney’s programming. Would a provider like AMC Networks Inc (NASDAQ:AMCX) want to license The Walking Dead to an Apple TV package if Apple also is a major competitor?
The most interesting aspect of the deal would be Apple’s ownership of ESPN. ESPN is struggling badly with cord-cutting, which threatens its business model of charging $7-plus per subscriber per month — whether subscribers are interested in sports or not. The Apple delivery system, from one standpoint, could invigorate ESPN.
From another standpoint, however, ESPN would be an anchor. Liberty Media Corporation (NASDAQ:FWONA) CEO John Malone speculated last year that Disney could split off ESPN and sell the rest of its assets to Apple for cash and/or Apple stock.
Apple may not want to enter the live sports fray — and it may not be interested in what could be a long-term decline in ESPN viewership.
All told, an Apple-Disney merger seems unlikely. Even RBC admitted as much … but that doesn’t mean Apple isn’t making a deal of some sort.
The Big Apple Deal
One argument against an AAPL-DIS merger is that Apple doesn’t do big deals. Its purchase of Beats Music for $3 billion was the largest deal Apple has ever pulled off.
But there’s reason to think that strategy may change. In January, AAPL CEO Tim Cook said Apple’s goal was to double services revenue in four years. As Fortune pointed out, that goal is unlikely without an acquisition — and it would take a reasonably large deal to get Apple to its ~$50 billion target. And Cook did say on the Q1 call that the company wasn’t constrained by size in considering acquisition targets.
That doesn’t mean Disney will be the target, of course. But Apple’s cash pile — particularly with some help from tax reform — and strategy creates a world of possibilities. Last September, another analyst speculated about an Apple takeover of Netflix, Inc. (NASDAQ:NFLX).
Bloomberg pointed out in February that Apple could have purchased Tesla Inc (NASDAQ:TSLA) to move along its self-driving car ambitions. The site also reported that AT&T Inc. (NYSE:T) feared a competing bid from Apple for Time Warner Inc (NYSE:TWX).
At some point, Apple likely will make a move. And the fact that Apple likely has to make such a move explains some of my skepticism toward Apple stock. The company simply hasn’t been able to drive growth beyond the iPhone on its own. If it has to buy that growth, it could bring added risk to AAPL stock.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.