Overview of the deal
Acquirer: Walt Disney Company
Target: Twenty-First Century Fox, Inc.
Estimated value: $52.4bn
Announcement date: December 2017
Acquirer Advisors: JPMorgan, Guggenheim Partners
Target Advisors: Goldman Sachs, Deutsche Bank, Centerview Partners
Walt Disney’s original all-stock offer was to acquire a downsized 21st Century Fox for $52.4bn after Fox spun-off a new entity called “New Fox” constituting their news assets, (television broadcasting), and the national operations of Fox Sports. This would leave Disney with Fox’s entertainment offering, notably its movie studios, and pay-television assets - all with strategic importance to Disney. Through the acquisition Fox’s 30% stake in the television streaming company Hulu, and its 39.14% stake in Sky plc, Europe’s biggest media and telecommunications company, would both be assumed by Disney.
However, a month long bidding war for Fox was sparked in June as Comcast, another American telecommunications conglomerate, made an unsolicited $65bn, all cash, offer to acquire the same Fox assets that Disney had placed their bid for. In response, Disney raised its bid to $71.3bn, restructuring the deal to include $36bn in cash. Subsequently, on July 19th Comcast retracted its bid, and on July 27th Disney and Fox shareholders approved the deal, currently awaiting international regulatory approval. The deal is expected to close early 2019.
The takeover battle comes as traditional media are scrambling to consolidate in the face of competition from streaming players such as Netflix and Amazon, which have deep pockets, massive programming libraries and growing global subscription businesses. The Disney-Fox deal would combine the company behind Avatar, X-Men and The Simpsons with Mickey Mouse, Iron Man and Han Solo, creating an intellectual property powerhouse with international distribution operations such as Star of India.
Company details (Walt Disney Company)
The Walt Disney Company is a multinational media and entertainment conglomerate. It was founded in America as an animation company and has proceeded to assume leadership in industries of film, television, and theme parks. It is the third largest conglomerate of its kind in the US.
- Founded in 1923, headquartered in Burbank, California
- President and CEO: Bob Iger
- Number of employees: 199,000
- Market Cap: $167.4bn - EV: $176.7bn
- LTM Revenue: $56.9bn - LTM EBITDA: $17.25bn
- LTM EV/Revenue: 3.1x - LTM EV/EBITDA: 10.2x
Company details (21st Century Fox, Inc.)
21st Century Fox is an American, multinational mass media corporation, spun-off from News Corporation, founded by Rupert Murdoch in 1979. It is the fourth largest media conglomerate in the US.
- Founded in 2013, headquartered in New York
- President and CEO: James Murdoch
- Number of employees: 21,500
- Market Cap: $83.4bn - EV: $104.4bn
- LTM Revenue: $29.2bn - LTM EBITDA: $6.5bn
- LTM EV/Revenue: 3.6x - LTM EV/EBITDA: 16.1x
Projections and assumptions
This deal is primarily driven by Disney’s survival strategy - to consolidate the media and entertainment business. This industry-wide trend has been sparked by the changing consumer habits and technological disruption following the popularisation of media streaming platforms, also called over-the-top (OTP) media services, such as Netflix and Amazon’s Prime Video services. The recently closed AT&T acquisition of Time Warner, who owned HBO and its OTP service, can be considered a milestone indicator of this trend.
Because of antitrust concerns, the DOJ forced the sale of 22 sports networks owned by Fox as a condition for approval. This decision prevented Disney from establishing an immediate monopoly in sports networks - as they currently own the sports channel ESPN. Furthermore, it is likely that the Disney-Fox deal will lead to further consolidation in the entertainment and media industries as participants compete both with technologically disruptive companies and behemoth conglomerates.
Disney is now positioned to become a strong competitor in the OTP space as it gains Fox’s 30% share of OTP service Hulu, bolstering their share to 60% with the other 30% being owned by Comcast through NBCUniversal - which Comcast bought complete ownership of in 2013. This move is a prelude to a greater concerted effort by Disney as they have separately announced that they will launch their own, new OTP platform, expected to be released in 2019.
Disney will gain a host of valuable assets and properties, allowing them to unlock economies of scale and of scope, as they integrate Fox’s assets into their existing infrastructure. Most noteworthy of all is that the deal will give Disney an unparalleled grip and dominance of culturally popular intellectual property and franchises, further allowing them to profit immensely and purely from the popularity of its products and how embedded these are in popular culture. It is likely that the traction of Disney’s intellectual property secures relatively low-risk revenue streams regardless of how this property is put into use; streams that are likely to stay intact even in the face of poor business choices or mismanagement. This could serve as a counteracting factor protecting Disney from any potential losses created by management difficulties and unnecessary bureaucracy stemming from their integration of Fox assets.
Not only will Disney fortify the strength of its wide product offerings but the deal also has the potential to strengthen their global coverage. Firstly they will now own Star TV, a pan-Asian TV service, and through them Star India, one of India’s largest media conglomerates. To note also is the 39.14% stake in Sky plc. owned by Fox, who also has previously attempted to acquire the remaining 60% of ownership rights. Comcast is currently in a bidding war with Fox over acquiring Sky, and their attempt to contest Disney’s bid for Fox is likely partly an attempt to secure that deal. Comcast backed on their Fox bid to statedly focus on acquiring Sky. Simultaneously Fox has stated that their bid will be unaffected by them being acquired. If they manage to win this contest then Disney will own assets which allow them to make a significant further push into Europe.
Risks and uncertainties
This transaction has already been cleared by the DOJ, however this does not mean that it is low-risk. It is relevant to note that the AT&T - Time Warner acquisition, which closed in June 2018, has now been appealed by the DOJ. While the odds are not in favour of a successful appeal, such a scenario would set a precedent, indicating a changing attitude towards the current trend of industry consolidation and the subsequent mega-deals taking place. Furthermore, as a downside of its size and global reach, Disney will have to await regulatory approval in several other jurisdictions, including the EU and India. Potential concessions Disney will have to make as a response to these outcomes of these complicates the picture, and could potentially disrupt current plans and add extra drag onto the whole deal, hindering or delaying a successful integration.
Furthermore, the interplay between this deal and the current competitive environment in the industry remains uncertain as Disney will likely continue facing competition through innovation from technological pressures and rivals regaining competitiveness as they follow Disney’s move towards consolidation. Disney will be vulnerable through the active Sky plc. deal, as they will have to contend in the bidding war with a more determined Comcast during a period when they should ideally be focusing on integrating their newly acquired assets. Acquiring Fox will add further debt to Disney’s conglomerate holdings because of Fox’s current bid for Sky which lies at $32.5bn and as Disney will already be assuming Fox’s current $13.7bn in net debt, in addition to the $36bn cash portion of their Fox purchase which will be entirely financed by debt. While Disney has stated that they are comfortable with the increased leverage it could prove problematic in the case of unforeseen circumstances.
We have a very strong balance sheet, which has provided us with great flexibility and attractive financing over the years, and we’ve always said we would be willing to deploy our balance sheet to advance our strategic objectives, this is one of those opportunities for us. -Christing McCarthy, Senior Executive Vice President and CIO, The Walt Disney Company
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