Why Walt Disney Co Should Buy Twenty-First Century Fox Inc

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There’s quite a bit of M&A activity in media lately, with the latest talks going on between Walt Disney Co (NYSE:DIS) and Twenty-First Century Fox Inc (NASDAQ:FOX). It’s not entirely clear if there are negotiations, or if there are even talks that are still continuing, but the idea has been floated by Disney, apparently.

Why DIS Stock Should Buy Twenty-First Century Fox Inc

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Is this tie-up a real possibility? I believe it is, I believe it would be great for shareholders of both companies, and I’ll tell you why.

DIS stock has been struggling recently, but management thinks there is a long-term move for Disney to buy FOX assets, specifically its movie and TV operations.

As it is, DIS stock’s success is assured in the long term, because Disney has amazing content assets including Pixar, Marvel and LucasFilm. The Star Wars studio just announced it would be producing another entire trilogy of the space-opera saga. Marvel films continues to deliver strong box office results. Pixar’s films are always wonderful and always do incredibly well.

Add in all the merchandising, theme parks and resorts, upcoming focus on turning Disney hotels into immersive excursions, cruise lines, Disney channel, and all the non-ESPN offerings, and Walt Disney Company is already the most diversified and successful consumer media company in the world.

FOX has a huge part of its business tied up in film and TV production. FOX has several franchises, some in partnership with Marvel, including Planet of the Apes, Alien, Kingsman, Deadpool, Maze Runner and all the Avatar films, and it owns the rights to the X-Men franchise.

On the TV side, it obviously has the FOX network slate of shows, as well as those at FX, a 50% ownership of Endemol Shine, all of the National Geographic channels and an ownership in Hulu.

Again, this is a content play, because content is king. Content isn’t just about movies or TV shows, but all the ancillary revenue opportunities they create. We may not exactly see the Alien monster at Disneyland, but you get my drift.

Yet the real key here is Disney’s upcoming streaming service. As it is, DIS pulled all its content from Netflix, Inc. (NASDAQ:NFLX). This had been an exclusive deal for Netflix. Instead, DIS stock now benefits from Disney keeping its own content exclusively on its own service. That means all the Star Wars properties, Marvel films and Pixar properties.

If Disney buys FOX, it would also then likely cancel licensing deals that FOX has to stream its content on NFLX and other providers, and move that content over to its own service.

With this massive amount of content, along with Disney Channel and other offerings, Disney can (and will) aggressively target NFLX as a competitor. Disney has said it would aggressively price its service below that of Netflix. Because NFLX is essentially becoming a primary provider of original content, the future is going to be about how many streaming services any household is willing to pay for.

I don’t see households ditching NFLX in favor of the Disney streaming service, initially, unless Netflix continues to raise prices, which it will have to do in order to maintain revenues. NFLX has lots of adult content that moms and dads aren’t going to get with just the Disney streaming service.

Bottom Line for DIS Stock

Revenues for FOX television and film content were almost $14 billion last year, with an OIBDA of $1.94 billion. That would add a hefty chunk to Disney’s top and bottom line. A very rough estimate is, even at 1x revenue, a bid of $14 billion for those assets would theoretically boost the FOX stock price by about 30% or $9-10 per share.

As for Disney, the long-term benefits it would gain from all this additional content would be a great deal.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns DIS stock. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


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