In Disney-Marvel deal, four not-so-fantastic points to consider


Check out the praise Wall Street lavished on Disney after the conglomerate said Monday that it is acquiring Marvel. "Great CEO" -- Soleil analyst Laura Martin's description of Disney boss Robert Iger;

"Longer-term benefits are substantial" -- Hilliard Lyons analyst Jeffrey Thomison;

"Catapults Disney into the undisputed content-tilted franchise incubator amongst the Big-5 vertically integrated companies" -- Caris & Co. analyst David Miller;

"Strategically logical" -- Pali's Richard Greenfield;

"Wise strategic move" -- Miller Tabak's David Joyce;

"Marvel offers many opportunities for the development of underutilized or unknown characters to be developed by Disney" -- Barclays Capital analyst Anthony DiClemente;

"Disney will likely improve Marvel's international consumer products business immediately" -- BernsteinResearch analyst Michael Nathanson.

Why, then, has Disney stock been falling, finishing Wednesday at $25.68? That's down 4.3% in the two days since the company announced its intent to acquire Marvel, further than the 3% drop for the S&P 500 and Nasdaq, the 2.4% fall on the Dow and the 2.9% drop for The Hollywood Reporter Showbiz 50.

Compliments aside, the answers lie with those very Wall Street research reports.

Here are four reasons for investors to be cautious:

Cost. Marvel shareholders will disagree, but the $4 billion price tag -- $50 per Marvel share -- is substantial. Thomison of Hilliard Lyons says Disney is paying 27 times Marvel's average annual earnings during the past three years. Disney, meanwhile, trades at a 15 multiple.

Dilution. Disney will pay 40% of that price with stock, so it said it will issue 59 million new shares. To avoid dilution, the company said it will buy back the same number during the next year. But even that strategy won't placate some investors because it could dent Disney's A2 Moody's rating.

"We expect that adding $4 billion of net debt (cash plus Disney's promise to re¬purchase the shares issued to buy Marvel) may lead to a downgrade of one notch," Soleil's Martin says.

Plus, the deal will knock Disney's earnings per share by about 5% this fiscal year and won't add to earnings until fiscal 2012.

Pre-existing deals. Marvel makes only a licensing fee from "X-Men" and "Spider-Man" movies; Fox and Sony/Columbia, respectively, get the bulk of the money. The first three films in the "Spider-Man" series, for example, brought in $2.9 billion for the studios while only $110 million flowed to Marvel via licensing fees, BernsteinResearch says.

Presumably, the numbers will be similar for the next three "Spider-Man" movies. Plus, the next five films from Marvel's own studio will be distributed by Paramount, limiting Disney's upside even after it owns Marvel.

Risky movies. Some analysts -- especially considering the weakening market for DVDs -- have gotten used to the idea of Disney emphasizing Pixar-animated films over live-action titles. With Marvel, though, Disney will be tempted to boost its live-action production again, even if it means focusing on such lesser-known superheroes not inhibited by pre-existing deals as Ant-Man, Nick Fury and Black Panther.

"The most challenging part of the trans¬action is that the biggest upside, long-term, comes from characters that are unproven theatrically," Pali's Greenfield says. Adds a more ominous Nathanson of BernsteinResearch: "Although senior management has been at the forefront of warning about the future health of the DVD market and has been reducing its financing of live-action titles, this deal pulls them back into that business in the grandest way. We are not sure why the company felt the need to do this deal."