Will Disney-Fox Set Off Scramble for Big Media Deals?

Kyle Hilton
21st Century Fox mogul Rupert Murdoch and Disney CEO Bob Iger unveiled a $52.4 billion deal on Thursday.

It's bad news for the sector — in particular Viacom — if a giant like Disney viewed itself "too small," an analyst says.

With its $52.4 billion deal to acquire a chunk of 21st Century Fox, Walt Disney has increased its size advantage over the competition to the degree that it could set off a mad fury of mergers and acquisitions in the media sector.  

"Investors are now curious about what deal might come next," says RBC Capital Markets analyst Steven Cahall. The Disney-Fox deal has laid "down the gauntlet for the rest of the industry," adds Macquarie Capital analyst Tim Nollen.

And Sanford C. Bernstein analyst Todd Juenger says it's bad news for the sector — in particular Viacom — if a giant like Disney viewed itself "too small."

Already, Discovery is buying Scripps Networks Interactive, but every company in media is looking for more scale, which could drive prices higher.

BTIG analyst Richard Greenfield wrote in a Wednesday report: "With Disney’s proposed acquisition of 20th Century Fox, we believe remaining film/TV studio assets will become increasingly valuable/scarce."

Several analysts say independent studios like Lionsgate and MGM should expect bids, but also Sony Pictures and Paramount, even though Viacom CEO Bob Bakish recently said he sees no need for any deals involving Paramount, calling the studio "an integral part of the company." 

Noting that "content goes good with content," Cahall says CBS should purchase Lionsgate, and says that in meetings with investors a hook-up between those two was discussed more than any other hypothetical merger. 

"We think CBS was a serious bidder for Starz, and recently management left the door open around potential M&A talks," Cahall argues.

CBS chairman and CEO Leslie Moonves last month indeed told CNBC: "Now we’re competing against monstrous companies. Disney is six times as big as we are. Comcast is six times as big as we are. Netflix's market cap is huge. Now Amazon, the No. 1 company in the world, is producing content. We’re sort of like an old-fashioned production company. We’re a small guy. Eventually are we going to need to do partnerships with other content companies and distribution companies? The answer is probably yes."

Another option, of course, is reuniting CBS with Viacom, owner of Comedy Central, BET, VH1, MTV and others. Cahall also says Time Warner, should its merger with AT&T fall apart amid regulatory scrutiny, would attract many suitors.

"M&A pressures could rise amongst all other network groups in the U.S. as well as in Europe, with basically all smaller players looking much more exposed," says Nollen. He even adds that the new Disney-Fox will "also put competitive pressure on Netflix and Amazon."

Also helping the M&A cause is the economy in general. Assurance, tax and advisory firm EY said Thursday that 81 percent of executives in technology, media and entertainment expect it to "continue improving — an indicator that has quadrupled over the past year."

EY says "growing optimism about economic and financial institutions create an environment ripe for dealmaking," while also noting that "dealmaking intentions remain near record levels."

Meanwhile, Comcast/NBCUniversal's look at a possible Fox bid has caused Wall Street to ponder what its next move could be. Naturally, it is seen as one possible suitor should AT&T's deal for Time Warner fall apart following the recent Department of Justice lawsuit to block it.

"In what direction does Comcast head next?" Greenfield wondered in an investor note. "Does it break up the company into two pieces so it can more aggressively pursue transactions with less regulatory risk? Does Comcast wait to see what happens with AT&T Time Warner?"

His conclusion: "All we know is Comcast has the firepower and desire to do a big deal; the question is simply what do they want to buy."

The ideas of the Murdoch family merging the remaining news- and sports-centric Fox assets with their News Corp, or of Disney splitting into two, have also been gaining some traction on Wall Street. Nollen recently argued that the Disney deal would give the Murdochs enough financial firepower "to do practically anything," including taking the company private.

And Greenfield says News Corp and what's left of Fox is a match made in heaven, in part because it would marry The Wall Street Journal with the Fox Business Network. But Fox executive co-chairman Rupert Murdoch on a call on Thursday said such a deal has not been on his mind.

"We haven’t thought about combining with News Corp," he told analysts. "If we do, it’s way, way in the future." During a Fox Business interview later, Murdoch answered the question of whether a combination of the remaining Fox businesses and News Corp was in the cards this way: "I don’t know. Ideally, yes. But that’s years away."

Meanwhile, Cahall asked in a recent report: “With more scale, would Disney sell/spin media?” He answered the question by saying, “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.”

Disney could then spin off its largest segment, media networks, consisting of the ABC broadcast network along with cable networks ESPN, Freeform and the various Disney Channels.

In that 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-off company, as would Disney’s increased stake in Hulu. Such a new-media networks company could attract the sort of attention on Wall Street that digital companies like Netflix, Amazon.com and even Roku enjoy, thrilling Disney shareholders who have watched their stock go nowhere for a year.

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