Summary:
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Walt Disney (DIS.US) to acquire part of 21st Century Fox (FOX.US) assets in a $71.3 billion deal
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Conditional regulatory clearance granted from the EU antitrust body
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Stunning Disney’s franchise portfolio to expand with new blockbusters
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Acquisition may smooth volatile film production division revenue
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Potential risk factor seen on Walt Disney chart
Walt Disney (DIS.US) is a company that needs no introduction. Perhaps everybody knows who Mickey Mouse is. However, the company is set to expand its franchise portfolio in a multi-billion dollar deal. With conditional approval received from one of the major antitrust agencies on Tuesday the deal is getting closer to be concluded. In this analysis we will look at the details of this big acquisition as well as its impact on company's business.
Walt Disney (DIS.US) enjoyed a stable revenue growth since the turn of millenia with just two slight pullbacks in 2008 and 2017. Moreover, the company managed to boost its profit margin significantly throughout the past dozen or so years. Source: Bloomberg, XTB Research
Walt Disney (DIS.US) announced a $52.4 billion deal to acquire 21st Century Fox (FOX.US) on 14 December 2017. However, Comcast (CMCSA.US) outbid Disney in mid-June 2018 with an offer of $65 billion. That was a start of a bidding war between the two companies. Nevertheless, the spat was short-lived as a new offer of $71.3 billion proposed by Walt Disney one week later caused Comcast to give up. Comcast later on focused on the acquisition of the controlling stake in Sky (SKY.UK), the UK media company.
Returning to the Disney-Fox deal, under the agreement Walt Disney will acquire entertainment part of the 21st Century Fox business including filmed entertainment, cable entertainment and direct broadcast satellite divisions. The remaining part of the 21st Century Fox will spin off and operate as a separate company. Once the deal is concluded Walt Disney’s franchise portfolio including Mickey Mouse, Star Wars or Marvel superheroes series will be expanded with such blockbusters as X-Men, Avatar or The Simpsons. After shareholders of the two companies agreed on the acquisition on July 27 the deal is said to be concluded in the first half of 2019.
Both Disney’s Studio Entertainment and Fox’s Filmed Entertainment divisions’ revenue are subject to significant volatility tied to the film premiere schedule. Acquisition may help smooth fluctuations. However, it should be noted that the two divisions are not fully uniform as Disney’s Studio Entertainment contains also music production business. Source: Bloomberg, XTB Research
However, as the proposed deal will be so-called “horizontal merger” - the merger of direct competitors - concerns were raised whether antitrust regulators will approve the move given the size of the two companies, especially as Walt Disney and Fox are two out of six major film producers in Hollywood. While the US antitrust approval was secured even before shareholders’ final decision on a deal , it still faces regulatory hurdles in other parts of the World. Probably the biggest one of them is out of the way already after the European Commission announced yesterday that it gave the deal a green light. However, conditions were placed and they mainly focus on divestiture in the factual TV networks business. Businesses of the both companies largely overlapped in this field and therefore Walt Disney made concession to drop its interest in channels like History, Crime+Investigation or Lifetime with ease. Let us recall that receiving the US clearance also was subject to divestitures of businesses generating $1 billion EBITDA annually (around 6% of Disney’s total EBITDA in 2017 fiscal year).
Disney’s major source of revenue - TV network business - is set to benefit from acquisition of part of the Fox’s TV channels. Source: Bloomberg, XTB Research
Moving on to the acquisition implications on the Walt Disney’s business, the company’s biggest segment by revenue - Media Networks, consisting of Disney’s huge portfolio of TV channels - is likely to reinforce its leading role with inclusion of some of the Fox channels. Revenue generated by the company’s second largest segment - Parks and Resorts, grouping theme parks (i.e. Disneylands) - threatened to end TV channel division supremacy as its revenue trailed Media Networks by just a notch in the past few quarters. However, now such a situation is unlikely to occur as Parks and Resorts segment will neither benefit nor get hurt by the deal. Probably the biggest impact of the acquisition will be visible in the Studio Entertainment segment. In this division one can find Walt Disney’s film production business that is set to benefit from acquisition of Fox movie production assets. It should be noted that movie production business is the most volatile major component of both companies revenues as it is closely tied to theatre premiere schedule. Having said that, merger of the two companies may smooth studio segment revenue fluctuations due to different timing of planned movie releases. Speaking of planned premieres, the next year’s schedule is looking promising with follow-ups of such blockbusters as Avengers, Star Wars or Frozen as well as a whole array of brand new Fox’s titles spread throughout 2019. Previous episodes of the aforementioned movies generated significant revenue for Walt Disney and this time it may be no different.
After some hectic moves earlier this year Walt Disney (DIS.US) moved close to its ATH from 2015 around $120 in the second half of October. However, a potential head and shoulders formation on the chart can be named as one of the short-term risk factors. Source: xStation5
