Why a Disney Deal With 21st Century Fox Makes Sense Now

THR 100 List 2017 -Lachlan Murdoch, Rupert Murdoch and James Murdoch - Getty-H 2017
Jason LaVeris/FilmMagic

Rupert Murdoch with his sons Lachlan (left) and James in 2014.

Fox executives have signaled many times that "scale for scale’s sake," as CEO James Murdoch put it last year, isn’t something they’re interested in.

That Rupert Murdoch and sons would consider selling off many of the assets of 21st Century Fox to the Walt Disney Co. — news that emerged on Monday — might have seemed bizarre just a few years ago, but in an era where AT&T may be merging with Time Warner, it could make sense, many observers say.

Disney has been considering a purchase of the Fox film and TV studios and other 21st Century Fox assets, which would leave the Murdoch-controlled conglomerate focused on its news and sports TV operations, including the Fox News, Fox Business Network and Fox Sports 1 cable channels, as well as the Fox broadcast network and TV stations it owns. 

For Disney, the benefits are obvious as it readies its streaming subscription service that is meant to rival Netflix. For now, it will contain Pixar- and Disney-branded TV shows and movies as well as Star Wars and Marvel content. Disney owns Marvel, but Fox has rights to some of the characters, like X-Men, and the Twitterverse is already lighting up at the possibility of reuniting the superheroes.

The benefits are a bit less obvious for 21st Century Fox, as Murdoch isn’t known for scaling back his media ambitions. But sports and news, plus retaining the Fox broadcast network while not having to compete as much with a growing stable of content creators, like Netflix, Amazon.com, YouTube, Facebook and others, could appeal to him, especially as his empire could still expand overseas. Plus, he also controls News Corp, parent of The Wall Street Journal and other publications, and re-merging a scaled-back 21st Century Fox with News Corp could be an option, as well.

Co-executive chairman Lachlan Murdoch even hinted at the notion of focusing more on sports via FS1 and news via Fox News Channel and Fox Business Network, all of which would be retained if a deal with Disney is to happen, insiders say.

“The scale and health of our sports and news broadcasting businesses continue to be a differentiator for us with over half of the company’s advertising revenues earned in these areas,” the exec said during an earnings call in May.

Stephen Cahall of RBC Capital Markets figures the Fox film studio is worth about $8.2 billion, and that all of the assets Disney wants, including the National Geographic and FX cable channels and some international channels, could be worth about $20 billion. Disney acquiring film franchises like Planet of the Apes, Kingsman and Alien, along with Oscar-worthy movies like The Revenant and Birdman, could go a long way in attracting more adult audiences to Disney, Cahall argues. He adds, though, that such a transaction would be "no regulatory walk in the park."

“Rupert Murdoch has big plans. He doesn’t want a smaller media company,” says Mike Kelly, CEO of Kelly Newman Ventures. “They’re thinking differently. We’re going from a linear to a digital world so those catalogues are tons more valuable, so why not monetize them right now? Bottom line: All media companies are trying to future-proof their businesses. They’ve got to be creative.”

21st Century Fox executives have signaled many times that dealmaking, or “scale for scale’s sake,” as CEO James Murdoch put it last year, isn’t something they’re interested in. On the other hand, the company in December offered to take full control of European pay TV giant Sky and U.K. regulators are still reviewing that deal, while it also offered about $80 billion to buy Time Warner before that entity agreed to merge with AT&T in a deal valued at $85.4 billion.

Rupert Murdoch, the co-executive chairman, has traditionally been seen as an acquirer, but the notion he’d even pursue such a large sale of assets is a sign that his sons, who have become the key faces and voices of the company, are more willing to let go of certain pieces.

Deal experts say that bringing together two studios and adding more cable networks to the Disney fold would create synergies, such as cost reductions and more leverage in carriage fee talks with pay TV operators. Disney’s strong consumer products business could also benefit from managing and licensing more characters and properties after a deal. And given Fox’s reputation for having a strong international business, including Star India and Sky in the U.K., Ireland, Italy, Germany and Austria, a deal would boost Disney’s global presence.

Bankers have been saying that after the AT&T deal for Time Warner, Lionsgate’s acquisition of Starz and Discovery Communications’ deal for Scripps Networks Interactive, more content industry mega-deals could be in the cards.

Barrington Research analyst Jim Goss, for example, wrote in a recent report: “AT&T's quest for Time Warner indicates no media target is too big to be on some company's wish list.”

James Murdoch has been talking about the hyper-competition of the digital age a lot lately, hinting that he’s open to doing something dramatic.

"Over the medium term, and approaching quickly, all video entertainment and news will be consumed over IP streaming networks," he said recently. "That means that what we create is released into an unprecedented competitive environment.”

On Monday, at least, it appeared that Wall Street loves the idea for both Disney and 21st Century Fox, as the former saw its shares rise 2 percent while the latter saw its stock surge 10 percent, even though it is early goings in negotiations and a deal may never be struck.

“It’s still largely a speculative notion, but not a crazy one,” says former media analyst Hal Vogel. “Feature films are a tough, no-growth business for the most part. TV licensing and streaming is where the better performance is likely. Rather than compete as a relatively small distributor against giant Disney, why not sell at this point? So as striking as this appears, it might be very smart.”

Adds Brian Wieser of Pivotal Research: "It would be beneficial for Disney, certainly, at least assuming the CEO succession issue is managed well. But the confusing part is what this means for Fox. This is far removed from their established strategies, and so it leaves many questions about what they are thinking at this time."