As expected, Walt Disney Co (NYSE:DIS) has signed an agreement in principle to buy the entertainment assets of Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA). The final price is $52.4 billion, but since they’re also taking on Fox’s debt the actual price is closer to $66 billion.
The deal would take between 12-18 months to close, the two companies admitted, and Disney CEO Bob Iger agreed to extend his employment contract to 2021 to complete the integration. There is a $2.5 billion break-up fee that Fox would collect if the deal is blocked.
The deal includes the Fox film studio, its regional sports networks and entertainment cable channels like National Geographic and FoxFX, international networks like Star India, as well as the Fox shares in Sky TV and Hulu.
Iger said the resulting company would be competitive with other over-the-top companies like Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL). But would this deal be a win for Disney shareholders?
The Risk Profile for DIS Stock
The combined company would be a doubling-down on two Disney divisions that have been losing sales, according to the company’s fourth-quarter report.
Media networks, which combines Disney’s television and cable assets, had 3% lower revenues and 12% lower profits than a year before. Fox’s quarterly report said it was still growing in these areas but the deal does not include Fox News, Fox Sports or the company’s owned-and-operated TV stations.
In an interview, Iger said the company would deliver paid internet-based sports programming next year under the ESPN name, family entertainment in 2019 under the Disney name, and position Hulu, in which it would have a controlling interest, as a more adult offering.
He said one technology platform would be used, but did not say whether that would be Hulu’s or BAMtech, which Disney bought earlier this year.
Can It be Stopped?
Variety expects the deal to face serious scrutiny in Washington, noting that the resulting company would still be weaker in the “last mile” assets that are getting net neutrality restrictions removed by the FCC. The concern is that carriers like Comcast Corporation (NASDAQ:CMCSA) — which owns NBC — or AT&T Inc. (NYSE:T) — which is buying Time Warner Inc. (NYSE:TWX) — might disadvantage Disney assets in favor of their own.
The possibility of another bidder should also be considered. The combined company would have a market cap of over $200 billion, but that would be dwarfed by any of the biggest cloud companies, including Amazon, Google, and Facebook Inc (NASDAQ:FB).
Apple Inc. (NASDAQ:AAPL), which has built out its own cloud network, might also become a potential bidder. Netflix, against which the new deal is being pitched, has a market cap of about $81 billion, more than Fox but half that of Disney.
Since no TV stations are changing hands, it’s also possible a Chinese company like Tencent Holdings Ltd (OTCMKTS:TCEHY) or Alibaba Group Holding Ltd (NYSE:BABA), might make a bid for all or part of the Fox assets.
Is This a Good Deal for Disney?
In terms of distribution, Disney would get a controlling stake in Hulu and Fox’s share of satellite businesses in Europe and Asia, but it would still not have a cloud or last-mile assets that competitors control.
The combined company would be the dominant U.S. player in filmed entertainment, controlling Marvel as well as Star Wars and The Simpsons.
Both Hulu and the satellite networks could become problematic. Comcast still owns 30% of Hulu, and Fox owns just 39% of Sky, although it wants the rest. Disney would also be taking on $12 billion in debt, hiking the debt-to-assets ratio, and Fox shareholders would own 25% of Disney, making the Murdoch family major players in Disney’s decisions after Iger retires.
Disney rose 1% after the deal was announced, while Fox was up .5%.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA, T and AMZN.
