Disney Closes $71.3 Billion Fox Deal, Creating Global Content Powerhouse
Wall Street and other experts have lauded the strategic benefits for Disney, but also highlighted the cost of launching a streaming service later this year, which will be a drag on earnings.
The Walt Disney Co. has closed its $71.3 billion acquisition of large parts of 21st Century Fox, expanding its global reach and content portfolio ahead of the planned launch of its own video streaming service.
With the mega-deal, Disney, led by chairman and CEO Bob Iger, is adding the Fox film and TV studio, the FX networks, National Geographic, Indian TV giant Star India and Fox's 30 percent stake in streaming service Hulu to its portfolio. The additional Hulu portion takes Disney's stake in the streamer to 60 percent (with Comcast owning 30 percent, and AT&T's Warner Media 10 percent).
Using fiscal-year 2017 data, Disney said in a regulatory filing that the new assets could quickly add about $19.3 billion in annual revenue and $1.6 billion in net income. In that fiscal year, Disney reported $55.1 billion in revenue and $9.4 billion in net income.
Disney has promised $2 billion in cost savings from the Fox takeover, with some in the industry expecting between 4,000 and 10,000 layoffs.
After getting a green light for the deal from shareholders, the U.S. Department of Justice, European regulators and Chinese regulators, the globe-spanning deal recently received final approvals from Brazil and Mexico.
Disney must still sell 22 regional sports networks in the U.S. and its sports networks in Brazil and Mexico as part of regulatory approvals in those markets. In Europe, the company agreed to sell its stakes in such networks as Lifetime and History.
Disney had in December 2017 struck a deal with Fox, controlled by the Murdoch family, for $52.4 billion. Comcast in June 2018 unveiled a $65.0 billion offer for the Fox assets before Disney shot back with a sweetened $71.3 billion offer that led Comcast to end its pursuit.
The U.S. cable giant then focused on a showdown with Fox over ownership of European pay TV giant Sky. Fox had offered to boost its 39 percent stake in Sky to 100 percent, but Comcast trumped that bid, leading to a rare auction — which Comcast won with a $39 billion offer for Sky. That sale closed late last year after Fox, backed by Disney, agreed to sell its 39 percent stake, just like other shareholders who had also accepted Comcast's takeover offer.
Wall Street and other experts have said that the Fox deal has strategic benefits for Disney and will boost its content and global power, but that the changed asset mix it brings along with the cost of launching the Disney+ streaming service later this year will be a drag on earnings over the near term.
BTIG's Richard Greenfield in a recent note even argued that "Disney’s streaming creates a financial black hole in an earnings-per-share valued company."
Most on Wall Street are looking to an April 11 Disney investor day to get more insight into the Disney+ plans and how they will affect financials. "We don't expect to learn much specific on April 11 either," Bernstein analyst Todd Juenger said in a recent report. "Our best hope is for a) launch retail price of Disney+ in the U.S.; and b) some indication of magnitude of investment. Our stretch wish is some indication of cadence of international rollout."
He said he and other analysts will update their financials models for Disney based on management commentary on that day. "From that, we will all hone our (widely disparate) models of subs, revenue, earnings and free cash flow impact and associated valuation," Juenger said.
A recent study from research firm Ampere Analysis suggested that Comcast, after its acquisition of Sky, and Walt Disney, after its Fox deal, will dominate global content spending, putting some distance between themselves and Netflix. The two giants will spend $2 of every $10 spent on content worldwide, or 20 percent, and 37 percent in the U.S. Disney's content spending will amount to an 11 percent share worldwide and 23 percent in the U.S., while Comcast will account for 9 and 14 percent, respectively, according to Ampere.
Meanwhile, analysts have been bullish or neutral on the outlook for the new Fox Corporation, which, now that the sale has been completed, will focus on U.S. news and sports more so than entertainment programming. The new Fox, led by Lachlan Murdoch as CEO and chairman and Rupert Murdoch as co-chairman, includes the Fox broadcast network, TV stations, the Fox News group and the Fox Sports assets.
"The new Fox will begin as the only media company solely focused on the domestic market; focused on what Americans love best — sports, news and entertainment, built and delivered for a U.S. audience," Rupert Murdoch said last year.
Buckingham Research Group analyst Matthew Harrigan recently maintained his "buy" rating and raised his price target on the stock of Fox to $54 after previously lauding "generally good numbers for the businesses to be contributed to new Fox." He concluded that the new Fox's "earnings component appears healthy."
On Tuesday, Fox's first day of trading as the slimmed-down version of its former self, the stock closed at $49.69. Disney said late Tuesday that each share of 21st Century Fox will be exchanged for $51.57 or .4517 shares of TWDC Holdco 613 Corp., which, for now, is the holding company of Disney and Fox.