The once improbable Walt Disney – 21st Century Fox mega-deal, the worst-kept secret in Hollywood and Wall Street, is now official.
To say that the all-stock transaction valued at $52.4 billion and $13.7 billion in debt will change the landscape of the media and entertainment industries may be the understatement of the year. Correction: It may be the biggest understatement in the history of understatements. No amount of hyperbole seems to do this transaction justice.
Here are my takeaways.
- Risks for 21st Century Fox. Rupert Murdoch and his sons James and Lachlan, who are both senior executives in his empire, are basically exiting the business of creating original content because they don’t think they have the scale to compete. It’s a concern that the Murdochs have had for awhile and explains why they made an unsolicited takeover offer for Time Warner a few years ago that was promptly rejected. The worries about content costs are understandable given that Netflix plans to spend $8 billion on original programming next year, Amazon’s content budget is $4.5 billion and Apple’s spending plan is around $1 billion. However, Fox is also missing out on the potential rewards of owning lucrative properties such as The Simpsons, The Americans, This Is Us and Modern Family. The Simpsons alone is worth billions. Time will tell whether the family is making the right call.
- Risks for Disney. The corporate parent of Mickey Mouse is expanding in the movie and television business at a time when broadcast and cable networks continue to face a myriad of challenges ranging from lackluster box-office results, declining ratings, escalating sports broadcast rights fees and the small but growing problem of cord-cutters. Disney’s Media Networks business, which includes ESPN, has long been a source of concern for investors given the problems at the “worldwide leader in sports.” Adding Fox’s 22 regional sports networks, which have the broadcast rights to 44 professional sports teams, should help with ESPN’s planned launch of a direct-to-consumer service early next year. The risks of merging the sports businesses, however, are considerable. Moreover, under terms of the deal Fox is retaining the Fox broadcast network and FS1 sports network, along with the Big 10 Networks, which presumably will be competing against Disney in future sports broadcast rights deals.
- Potential Fox rewards. Selling its under-managed movie and television production business will enable the Murdochs to focus on what they do best, running broadcast and cable networks. In its fiscal year ended June 30, Fox’s Cable Network Programming business generated more than $16 billion in revenue on profit excluding some costs of $5.6 billion. That’s more than the combined performance of Filmed Entertainment ($8.3 billion revenue and profit of $1.05 billion) and Television ($5.6 billion revenue on profit of $894 million). Fox News remains by far the most profitable of all the cable news networks, and Fox Business is proving to be a formidable rival to Comcast’s CNBC.
- Potential Disney rewards. Disney will take control of the money-losing Hulu streaming service, which may propel it to become a serious rival to Netflix. The Burbank, Calif.-based company will also be able to expand its international footprint thanks to Fox’s holdings in the U.K., Latin America, and India. Adding the Fox content to its library will yield benefits for years, particularly when Disney launches its OTT (Over the Top Service) in 2019. One thing’s for sure: It’s only a matter of time before Disney’s resorts have Simpsons-themed rides.
- Lingering questions. I am still perplexed why Fox is retaining the company’s real estate including the storied 20th Century Fox backlot, which the company could easily sell for billions of dollars given its prime location in the Los Angeles area. Like I said yesterday, Disney already has its own lot and doesn’t need a second one. Then again, I realize that Bob Iger and the Murdochs have done fine without my advice. Speaking of the Murdochs, Iger said he had discussions with James Murdoch about a senior role with Disney once the deal closes, though no job offer has been made. There has been no shortage of family drama for the Murdochs over the years so James Murdoch’s future will be of keen interest to investors. The companies argue that the deal will generate $2 billion in savings, claims that should always be greeted with skepticism. Other mega-deals are sure to follow. Finally, there is the question of antitrust regulators. Though experts said there are no red flags with the Disney-Fox deal, they said the same things about AT&T’s $84.5 billion acquisition and were proven wrong.