How Disney, Fox, Sector Stocks Are Reacting to $52.4B Mega-Deal

Bob Iger - H  - 2017

The Disney stock reaction "could be muted by mixed strategic merits," one analyst had predicted, citing the inclusion of Fox's regional sports networks in the transaction.

The stocks of Walt Disney and 21st Century Fox didn't budge much in early Thursday trading after the entertainment giants made their $52.4 billion mega-deal official.

Fox shares traded down 0.4 percent at $32.62 minutes into the trading session, while Disney shares were up 0.4 percent at $108.05.

Other sector stocks on Thursday opened mostly higher, with Time Warner shares trading up 0.2 percent, CBS Corp. up 1.2 percent and Viacom up 1.3 percent. And even shares of Netflix, which Disney is seen taking aim at with the deal, were up 0.1 percent early in the day,

Sanford C. Bernstein analyst Todd Juenger said in a recent report that Disney's need to get bigger was "bad news" for the likes of Viacom, Discovery and AMC Networks. "But we recognize these heavily shorted names typically rally on any sector M&A."

Fox and Disney had been negotiating a transaction in recent weeks, unveiling it before the market open on Thursday. Disney will buy Fox's film and TV studio, the FX and National Geographic networks and other assets, including many of Fox's international TV holdings and its 30 percent stake in Hulu. The remaining Fox will consist of the Fox broadcast network and TV stations, Fox News, Fox Business Network and Fox Sports.

Given that certain terms of the deal had been leaked to the media in recent weeks, the stocks weren't expected to react too much once the deal was became official. Analysts had mostly predicted big stock moves in the case any of the final terms ended up looking much different. 

B. Riley FBR analyst Barton Crockett had last week said that as long as the terms were "near" what became known ahead of time, the deal "could be close to an earnings per share wash, initially, we estimate, for Disney." He added: "The stock reaction could be muted by mixed strategic merits. Positively, Disney would buy Fox's Star, thereby gaining instant dominance in India, arguably the world's best TV growth market. More problematic could be Disney's acquisition of Fox's regional sports networks. This would increase Disney's exposure to rapidly rising sports rights fees and skinny bundle risks, which, via ESPN, have driven underperformance for Disney's equity for the past couple of years." He has rated both stocks at "neutral."  

Macquarie Capital analyst Tim Nollen also has "neutral" ratings on both stocks, but has focused on the positives of the deal. "This would lay down the gauntlet for the rest of the industry," he wrote in a recent report. "For Disney, scale and distribution together matter more now, and this would give it both in droves."

Among the benefits Nollen highlighted: "Owning a second major studio could help Disney build out its OTT platform due to launch in 2019 with more content, and owning a majority stake in Hulu would give Disney control of this SVOD service as well as a potentially large virtual bundle to help offset cable sub declines. Equally important, this would give Disney a much bigger international TV presence at a time when its brand equity is growing through its films and parks."

He added: "A new Disney/Fox would also put competitive pressure on Netflix and Amazon, but it’s their very success that has prompted this combo."