Walt Disney Co (NYSE:DIS) appears poised for dominance in content ownership. The company already owns what many regard as the best content library in the world. Now, with the upcoming purchase of Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA), that content library will improve further. However, regulatory hurdles and funding the purchase place negative pressure on DIS stock.
Disney will perform well in the longterm with or without Fox. However, given the short- and medium-term effects of the acquisition, investors should hold off on DIS stock pending further news.
Before the acquisition, I expressed a more bullish view on DIS stock. I even went so far as saying missing quarterly earnings did not matter. In the long run, I still hold to this view.
With Disney’s classic content, Pixar, Marvel, and LucasArts, DIS already owns the content it needs to mount a formidable competitive challenge to Netflix, Inc. (NASDAQ:NFLX) and any other streaming service.
DIS Stock Could Be Hurt by Dilution and Debt
What will hurt Walt Disney stock in the near term is the cost of absorbing Fox. Acquiring Fox will come at the price of much higher debt levels. Stock dilution will also bode poorly in the short term. Disney will pay $52.4 billion in an all-stock transaction to acquire Fox.
The deal includes assuming $20 billion in debt and receiving $6.3 billion in cash, which takes the deal to an enterprise value of just over $66 billion. As of the last earnings report, Disney held just over $19.11 billion in long-term debt and an additional $6.17 billion in short-term debt.
With Fox’s $19.85 billion added, that takes Disney’s debt after the merger to over $45.1 billion. This exceeds Disney’s current book value of $41.32 billion. Disney can handle this debt burden even without Fox’s assets. However, shareholders are in for a rough ride for Walt Disney stock in the near term.
Regulatory Approval Far from Certain
Further, regulatory approval remains far from likely. The Trump Administration has shown it is reticent to allow industry domination. The government has blocked a similar merger by AT&T Inc. (NYSE:T) and Time Warner Inc (NYSE:TWX) recently.
They also prevented T-Mobile US Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S) from becoming one. They might take a similar view on Disney dominating TV and movie content.
As suggested by our own Will Ashworth, one possible concession involves spinning off ESPN. On this point, I agree with my colleague. ESPN has evolved into a poorly-run division in an otherwise well-run company. Where most of the company grows or shows signs of returning to growth, ESPN loses value.
While much of the company (theme parks, movie releases) brings largely positive publicity, ESPN brings embarrassment with the ESPN president’s sudden resignation.
Removing the ESPN albatross to focus on content dominance would boost Walt Disney stock as well as the company’s reputation overall. Disney should consider this move regardless of whether the Fox merger occurs.
Bottom line on Disney stock
Although the merger brings near-term uncertainty to DIS stock, the Disney remains well-positioned to prosper in either case. Acquiring Fox makes the world’s best content library even better. However, the merger will come at the cost of a devalued stock and increased debt.
It’s also far from a guarantee as the current administration in Washington has shown a reluctance to approve mergers that so much as hint at monopoly power. An ESPN spinoff could help approval and remove an underperforming unit of the company. However, that remains only an option at this stage.
The most important thing for DIS stock investors to remember is that the company wins in either case. The company already owns the media assets it needs to make Disney streaming a huge success. With or without Fox, a long-term investment in Disney stock will bring adults all of the happiness enjoyed by a small child at Walt Disney World.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
