The biggest market news on Monday came from a CNBC report that Walt Disney Co (NYSE:DIS) has held talks to buy a significant amount of assets from Twenty-First Century Fox Inc (NASDAQ:FOX,FOXA). Both Fox and Walt Disney stock have struggled of late, but investors greeted the news with optimism. DIS stock closed up 2%; FOX shares gained 9%, and FOXA rose 10%.
From Disney’s standpoint, the deal makes a lot of sense in concert with other recent moves. The talks, which David Faber reported have ended at least for now, seem to show the company’s strategy going forward. DIS stock has been dogged by concerns about its ESPN division, one key reason the stock has been stagnant for nearly three years. I argued just last month that Disney’s problems run much deeper, with profits from its networks beyond ESPN and its studio business down so far in 2017.
But Disney sees a path out – and as bearish as I’ve been on Walt Disney stock, that path does make some sense. As investors continue to debate whether media profits will accrue more to content providers like Disney and Fox, or distribution companies like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN), Disney’s simple answer is to be both.
Walt Disney Stock Rises – Finally
While a 2% gain might not seem like much, DIS stock has been looking for good news for some time. Revenue has missed Street estimates for the last four quarters; Disney stock is down for the year and had pulled back over 15% from late April highs heading into Monday’s trading.
It’s worth emphasizing that Faber’s sources said that no deal appears imminent, but such a purchase would appear to be a coup for Disney and would boost Walt Disney stock. As an aside, Faber had a big Monday, also reporting on the potential interest in Charter Communications, Inc. (NASDAQ:CHTR) from Sprint Corp (NYSE:S) owner Softbank Corp. (Japan) (OTCMKTS:SFTBY).
Because of antitrust concerns, Disney wouldn’t pick up the Fox broadcasting network, Fox Sports or Fox News. But the rest of the portfolio would look enticing. Disney would add Fox’s movie assets which, as many comic book fans instantly pointed out, would presage a reunion of the X-Men series, whose live-action rights are owned by Fox, with the Marvel Comics universe owned by Disney. Cable channels FX and National Geographic (the latter an obvious for the family-friendly Disney brand) would come along as well.
From an asset standpoint, the deal would further diversify Disney away from its networks division, which still is generating ~45% of the company’s total operating profit. It would only add to its powerhouse franchise roster, which already includes Marvel, Star Wars, and Pixar offerings like The Incredibles and Toy Story. And it would add significant content to back Disney’s streaming platform, which might be the most attractive aspect of the potential deal.
Disney’s Strategy Revealed?
Even if the Fox deal isn’t imminent, the talks themselves look positive for DIS stock. From a short- to mid-term standpoint, they at least get investors talking about something besides the weakness at ESPN (not to mention ABC and Freeform). They turn the attention back to the company’s hugely valuable intellectual property holdings which have been the core of Disney business over the years.
From a long-term standpoint, the interest in Fox’s assets highlights a potentially proactive strategy for Disney. The company is launching its own streaming service in 2019, and has pulled its content from Netflix ahead of that move. And while there might have been some concern that Disney would be too ‘niche’ to support its own platform, suddenly a larger Disney looks like a potential rival to Netflix and Amazon, not a supplier that might be squeezed. A Fox-Disney deal might also impact Hulu, of which each company owns 30%. Disney could look to consolidate that platform, buying out fellow owners Comcast Corporation (NASDAQ:CMCSA) and Time Warner Inc (NYSE:TWX).
Between ESPN, Disney’s family-focused library and content from Fox (and maybe other providers), Disney would have at least one must-have for almost every cord-cutter. As Netflix and Amazon have crossed over from being distributors to content creators, Disney can go the other way, building a distribution business on top of powerhouse content. That actually seems an easier direction particularly given the strength of Disney’s numerous brands.
The Benefits for DIS Stock
And that’s not a strategy that is reliant on a deal with Fox. Plenty of other content could be for sale, one key reason stocks like Viacom, Inc. (NASDAQ:VIA,VIAB), AMC Networks Inc (NASDAQ:AMCX) and Discovery Communications Inc. (NASDAQ:DISCA) also spiked on Monday.
The broad point is that a company that looked potentially boxed in by cord-cutting now very well may have a powerful strategy to not only survive, but also to thrive in that environment. And if that’s the case, the benefits to DIS stock will be much greater than the 2% gains seen on Monday.
Vince Martin owns shares of AMC Networks Inc, and has no positions in any other securities mentioned.
