Pivotal Research Group analyst Brian Wieser believes Walt Disney Co (NYSE:DIS) is between a rock and a hard place and that’s not good for Disney stock. According to Wieser, Bob Iger’s damned if he does and damned if he doesn’t, leaving the Disney CEO in a lose-lose scenario.
“The stock’s recent run-up fails to reflect that a higher price paid for Fox’s Entertainment assets would reduce the value of Disney to its shareholders,” Wieser wrote. “Alternately, the absence of completion of the transaction would also be negative for Disney as it would mean the company would be unable to realize the synergies it expects to produce from the transaction.”
As a result of this pickle, Wieser’s downgraded Disney stock to “sell” from “hold” with a 12-month price target of $93, about 12% lower than where it’s currently trading.
The Lesser of Two Evils
Recently, I suggested that Bob Iger would match the $65 billion offer by Comcast Corporation (NASDAQ:CMCSA), but wouldn’t go any higher than that.
I also suggested the top up would come in the form of additional DIS stock, not cash, but the scuttlebutt seems to be that they would sweeten the deal with $10 billion in cash. If so, Disney would be adding $30 billion in debt to its balance sheet, bringing its total long-term debt to $49 billion, 158% higher than its current leverage.
Of course, $20 billion of that is already factored into its all-stock bid; the additional leverage wouldn’t come as a shock to Iger.
Nonetheless, with interest rates rising, is now the time to be taking on more debt? Some experts suggest that Comcast’s debt levels would be impossibly high were it to win the battle for Fox’s assets.
“Moody’s warned in a report last week that it may downgrade Comcast’s credit rating if Comcast pulls off the bid for 21st Century Fox,” CNN Money reported June 18. “Moody’s estimates that, if it acquires both Sky and 21st Century Fox, Comcast’s debt will soar from about 2.5 times its annual profit to about 4.25 times.”
Disney has always been financially conservative when making acquisitions. I just don’t see the company going beyond $65 billion, whether it’s all-stock or stock and cash; if Brian Roberts really wants Fox, he probably can win by adding another $10 billion to the final purchase price.
Frankly, if Roberts does counter Disney’s match of $65 billion, Iger would be silly to counter a third time.
Sometimes, you have to be willing to walk away. At $75 billion, I believe it’s one of those times.
The Bottom Line on Disney Stock
Wieser thinks Disney is headed below $100 whether it wins or loses the Fox assets. He could be right.
What I do know is that Comcast wants and needs the Fox assets far more than Disney does making CEO Brian Roberts desperate for a win.
“They’ve [Comcast] done well being vertically integrated in the U.S. but they realize that business is slowing. You want to add a little to your business in the U.S. but what you really want is to replicate that success globally,” suggests Rich Greenfield, a managing director and media analyst at BTIG. “No other assets let you go global like Fox’s stake in Sky Broadcasting, Star in India and Fox’s Latin America assets. It’s very hard to see another obvious fallback plan if you’re Comcast…. you can see why [it] feels it must ultimately win.”
In the short term Disney stock could take a hit failing to corral the Fox assets. Long term, it could turn out to be a blessing in disguise for Bob Iger.
When it comes to M&A, it’s not the deals you didn’t do, but often the deals you did that do you in.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
