Analysts marvel at Disney's premium purchase

Marvel acquisition will dilute Disney earnings until 2012

Rivals feel heat from Marvel-Disney deal
Disney-Marvel union will bring costume changes

NEW YORK -- Why does Disney feel it has to pay $4 billion to buy Marvel Entertainment, and why now?

That is one key question that Wall Street observers are trying to wrap their arms around after the announcement Monday morning of the first major entertainment industry acquisition in a while.

Most expect Disney will help elevate Marvel character's exposure across the globe and distribution platforms, but the financial benefits are longer-term and require solid execution, many argue.

In a conference call with Disney and Marvel executives, analysts asked -- first indirectly, then directly -- why Disney CEO Bob Iger and CFO Tom Staggs were willing to pay the high price tag of $50 per share, which amounts to a 29% premium over Friday's closing price.

Disney had to pay a "full and fair price" as Marvel is a "premium" company, Staggs said. "This is not a deal they had to do," he added. "Nor was it a deal Disney had to do."

But Staggs and Iger said both companies realized they could create more value together.

Asked by another analyst if Disney couldn't elevate any company, so why buy Marvel, Iger said the companies are a great fit, and he felt the time was right.

Disney executives also emphasized their confidence that Disney will make the deal work financially, even though they said it will be more about additional revenue opportunities than cost cuts.

Staggs detailed that the Marvel acquisition will dilute Disney's earnings in the mid single digit range in fiscal year 2010 and dilute them again in fiscal 2011 before finally starting to add to earnings by fiscal 2012.

"2012 is a long time!" said one Wall Street observer in a first reaction.

And Miller Tabak analyst David Joyce said the deal "should put some near-term risk arbitration pressure on" Disney shares, pointing out the deal value comes at multiples seen two to three years ago before the prolonged recession and credit crunch.

Indeed, Disney's stock fell 3% to $26.04. "We are a little surprised that Disney stock is not down a little more than it is today, but Disney has a $60 billion enterprise value, so even if it overpays a bit, it is not a major negative to the company," said Natixis Bleichroeder analyst Alan Gould.

Joyce said that despite the juicy price tag, the deal is "strategically and financially justifiable by the value we think can be unlocked."

Meanwhile, credit agency Standard & Poor's Rating Services Monday afternoon put Disney debt on review for a potential ratings downgrade, citing the Marvel deal and the potential that Disney will have to issue debt to pay for it.

That along with lower cash flows from businesses hit by the recession and the high purchase price for Marvel could lead to debt leverage "remaining above our threshold for an extended period," said S&P. Analyst Deborah Kinzer said she is "concerned that the Marvel acquisition will increase DIsney's debt without concomitant growth in (operating cash flow)."

Meanwhile, Iger on Monday also lauded Marvel's branded content strength as a positive amid the declining DVD market. "They are not bulletproof," he said. "They are not immune from the changes that we're seeing. But they have established a footing that we think is more solid than what you typically see in the non-branded, non-character driven (movie space)."