Breaking Down The Fox And Disney Mega Deal

Disney (NYSE: DIS) announced that it will acquire much of 21^st Century Fox‘s (NYSE: FOX) portfolio in a stock deal valued at $52.4 billion, integrating much of Fox’s studio and television network operations into its business. The assets being sold in this deal include many of Fox’s offerings on television – Nat Geo, Star India, and regional sports networks – as well as its stake in Sky and Hulu, in addition to Fox Studios. On the other hand, Fox’s focus will shift to producing news and sports content for newspapers and TV channels, by spinning off its broadcasting networks – Fox News, Fox Sports and the Big Ten Network – into a separate company. The transaction, which is subject to regulatory approval, is expected to close in the coming 12-18 months. Below we outline some of the key takeaways from the deal here.

Our $111 price estimate for Disney’ stock is about in line with current market price, while our $33 price estimate for Fox’s stock is slightly below the current market price.

Deal Details

At the end of fiscal 2017, Disney’s total debt (long-term and short-term) stood at over $25 billion. To see the Fox acquisition through, the company will have to absorb $13.7 billion of Fox’s debt, taking Disney’s total debt load to about $39 billion. Disney’s adjusted EBITDA for fiscal 2017 ended September stood at around $20 billion, while Fox’s adjusted trailing 12-month EBITDA was around $7.5 billion. According to our estimates, the assets which Disney will acquire contributed somewhere around $4 billion in EBITDA during this period. The company expects Fox’s segments to contribute meaningfully to Disney’s business by fiscal 2019. We forecast Disney’s EBITDA (excluding Fox) to reach close to $22 billion in fiscal 2019. Based on these numbers, the combined entity’s EBITDA is likely to be in the $26- 27 billion range in fiscal 2019. However, since the acquisition is expected to yield over $2 billion in cost synergies, this figure could be even higher depending on how quickly those synergies are achieved. Accordingly, Disney’s debt to EBITDA ratio will likely remain in the 1.3x to 1.5x range going forward, which is a manageable figure.

Fox Studios Is A Good Fit For Disney

Per Trefis estimates, both Fox and Disney’s studio operations contribute around 15% of each respective company’s value. Fox’s studio operations contribute almost 30% of its total revenues, while Disney’s studio operation makes up 17% of the company’s total revenues. Disney will use movie content from Fox to compete in the rapidly changing streaming space, where competition now includes companies such as Amazon (NASDAQ: AMZN) and Netflix (NASDAQ: NFLX). The addition of Fox’s movie portfolio could direct more consumers to Disney’s streaming platform, which is expected to launch in 2019, following the expiry of the Netflix and Disney’s deal at the end of 2018. This union should also provide a blend of animated movies from both studios – including Toy Story, Finding Nemo, Ice Age, and Rio – into one streaming offering, which could be very attractive to customers. There is also a possibility that Fox’s addition to Disney’s library could lead to Marvel franchises such as The Avengers, the Guardians Of The Galaxy, the Fantastic Four, and The X-Men (including Deadpool) all appearing on screen together. The combined Fox and Disney entity should have around a 30% domestic market share, which would put it ahead of all other studios.

Vast Sports Television Network

After this transaction, Disney will now control 22 Fox Sports regional sports networks that hold exclusive local rights to 44 MLB, NBA, and NHL team broadcasts. In addition, the company will possess the Star network in India, which consists of 49 regional entertainment channels and 10 sports channels, along with its digital streaming platform Hotstar. These international and regional sports networks should be a solid addition to Disney’s sports portfolio, which already includes ESPN.

ESPN has been grappling with subscriber losses due to the emergence of alternative viewing platforms, and has lost more than 10 million subscribers over the last four years. Disney has committed to spending a significant sum of $45 billion as part of its long-term sports programming rights commitment in the hopes of boosting (or at least retaining) its subscriber base.

Please refer to our complete analysis for Disney & 21st Century Fox