Will Disney Eventually Split in Two Post-Fox Merger?

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If Disney purchases most of Fox, some say it makes sense to split the former in half and take what remains of the latter private.

If Disney buys most of the assets of 21st Century Fox, as it is negotiating to do now, could it be the next major media conglomerate to split in two? The idea is gaining some traction on Wall Street.

In one scenario, Disney could spin off its largest segment, media networks, which accounted for $23.7 billion of the conglomerate’s $55.6 billion in revenue in its most recent fiscal year. Media networks consists of the ABC broadcast network along with cable networks ESPN, Freeform and the various Disney Channels. In a spinoff scenario, Disney’s upcoming streaming services — one for ESPN and another for Disney, Pixar, Star Wars and Marvel content — would be part of the spun-out company, as would Disney’s share of Hulu, which could increase to majority status if it’s included in a Fox deal.

In such a scenario, the newly minted media-networks company could attract the sort of attention on Wall Street that digital companies like Netflix, Amazon.com and even Roku enjoy, which would surely thrill investors who have seen their Disney shares rise just 1 percent in 2017. Meanwhile, Netflix shares are up 52 percent, Amazon shares are up 55 percent and Roku shares have more than doubled just in the two months since the streaming-media company went public.

If Fox’s regional sports networks are included, the spinoff would not only be considered a fast-growth streaming company but also an unrivaled sports powerhouse, since ESPN and ABC (not exactly a slacker in sports) would also reside there.

“ABC carries a lot of sports and the ability to effectively jointly bid, broadcast and produce sports seems to offer economies of scale,” said Steven Birenberg of Northlake Capital Management. “I certainly think Disney will get lots of proposals from investment bankers on this idea should they close the Fox deal.”

RBC Capital Markets analyst Steven Cahall asked in a recent report: “With more scale, would Disney sell/spin media?”

He answered his own question by explaining, “Disney could bring Fox assets 20th Century, FX and Nat Geo in to form a mega production company supplying the direct-to-consumer/subscription VOD market.”

If Disney’s media assets were spun out, they would leave behind the film studios and theme parks, a company more in line with founder Walt Disney’s earliest vision (the studio’s first film was in 1937 and it opened its first theme park in 1955, while it purchased ABC and ESPN long after Walt’s death).

Disney and Fox have each hired their team of investment bankers and a deal could be inked as early as next week, though some insiders speculate that it will be nearer to Christmas, assuming the two can come to terms on some complicated sticking points.

On the flip side of the Fox-Disney deal is what would be left behind for Rupert Murdoch.

Ever since splitting his empire into 21st Century Fox and News Corp in 2013, investors have been wondering if he would take the latter private since publishing stocks get no respect on Wall Street. Examples abound: Time Inc. sunk for years before Meredith, publisher of Better Homes & Gardens, agreed on Nov. 26 to buy its rival for $1.8 billion, less than it was worth when it was split from Time Warner four years ago; shares of the New York Times Co. trade lower now than they did a decade ago; and in 2013, Amazon.com founder Jeff Bezos famously purchased The Washington Post for just $250 million, which was considered a generous price.

And News Corp itself trades lower now than it did three years ago, even though the stock has been rising for the past several weeks as Wall Street mulls Murdoch’s intentions.

Many expect Murdoch to consider recombining the remaining portion of Fox with News Corp, then go private with a company consisting of the Fox broadcast network and stations, Fox News Channel, Fox Business Network, Fox Sports, The Wall Street Journal, New York Post and Britain’s The Sun and The Times.

Murdoch, a few years before the split of his empire, said he didn't understand why Sumner Redstone had split CBS from Viacom, suggesting he wasn’t really at ease with the idea of splitting up his conglomerate.

Macquarie Capital analyst Amy Yong said that while a Disney acquisition of large parts of Fox would likely come in the form of an all-stock deal, it could yield as much as $60 billion “for the Murdochs to do practically anything with, including taking the company private and/or re-merging with News Corp.”

Jefferies analyst John Janedis told investors that in a Disney-Fox deal, Disney could assume all of Fox’s debt, leaving the remaining Fox in an enviable financial position. “While the company has the capacity to bear about $7 billion of debt, the Murdochs have historically been leverage-averse, and a clean balance sheet leaves the door open for the family to take the company private further down the road,” he said.

Yong assigns a value of around $30 billion to the Fox assets the Murdochs are looking to keep and notes that News Corp’s market cap usually hovers around $9.5 billion, while “net cash gives it an enterprise value of about $8 billion.”

While a publicly traded company has the advantage of having stock that is a liquid asset for shareholders, it also requires compliance with far more regulatory and corporate-governance rules, plus it is held to quarterly earnings and other expectations, which is why in recent years the number of privately held companies has been on the rise. The thought of freeing himself from a myriad of bureaucratic constraints to focus more on running a media empire might be very appealing to the 86-year-old Murdoch.