Buying Disney Makes no Sense for Verizon

Every once in a while Mr. Market gets a really dumb idea in his head that captures the popular imagination. A great example of this is the proposition that Verizon Communications (NYSE: VZ) would buy the Walt Disney Company (NYSE: DIS).

Investors became obsessed with the idea after one article in The New York Post, but nobody asked either Verizon CEO Lowell McAdam or Bob Iger what they thought about it. McAdam’s response to a Disney merger was a simple “no,” Variety reported. Iger apparently cannot even be bothered to comment on the matter which indicates it is nonsense.

What’s truly bothersome is that investors sensing an increase in stock value bought into this drivel. Any quick look at the financials and common sense dictate that there is no good reason for a Disney/Verizon merger.

Why Verizon does not need Disney

There is a simple reason why Disney and Verizon do not need each other both companies are making a lot of money without each other. Ycharts data indicates that these companies are doing great on their own.

Some data that indicates why the merger will not happen and is not needed includes:

Verizon:

 

• Revenues of $123.62 billion on March 31, 2017. Those revenues are falling (they were $131.81 billion in March 2016) but they’re still great.

 

• A net income of $12.27 billion on March 31, 2017. That’s down from $17.97 billion in March 2016, but it’s still very, very good.

 

• A profit margin of 11.57% on March 31, 2017.

• Assets of $246.73 billion on March 31, 2017.

 

• Cash and short-term investments of $246.73 billion on March 31, 2017.

 

• $16.90 billion in cash from operations on March 31, 2017.

 

• A market capitalization of $177.74 billion on July 18, 2017.

 

• An enterprise value of $291.89 billion on July 18, 2017.

Disney:

 

• Revenues of $55.54 billion on March 31, 2017. Down slightly from $54.83 billion on March 31, 2016.

 

• A net income of $9.235 billion on March 31, 2017. This was a slight increase over $9.115 billion a year earlier.

 

• A free cash flow of $2.555 billion on March 31, 2017. An increase over $2.379 billion a year earlier.

 

• A profit margin of 17.91% on March 31, 2017.

 

• Assets of $91.81 billion on March 31, 2017.

 

• Cash and short-term investments of $3.80 billion on March 31, 2017.

 

• $11.93 billion in cash from operations on March 31, 2017.

 

• A market capitalization of $164.80 billion on July 18, 2017.

 

• An enterprise value of $185.32 billion on July 18, 2017.

 

The only advantage Disney might have over Verizon in the value department is more cash flow. Verizon reported a negative cash flow of -$1.582 billion on March 31, 2017. My take is the other numbers like cash from operations more than make up for that. Verizon has a lot of float which makes it a pretty good value investment.

Verizon is a Better Value Investment than Disney

What’s truly interesting is that Verizon is a better value investment than Disney.

A Verizon share was selling for $43.55 on July 18, 2017, yet its investors received a return on equity of 58.77% on March 31, 2017. Those investors also took home a 57.75¢ dividend on July 6, 2017. That number was up from 56.50¢ on in July 2016 which makes Verizon a great dividend stock.

Disney is a good stock but I think it’s overvalued at the $105.31 it was trading at on July 18, 2017. Verizon was certainly a much better deal because Disney shareholders received a return on equity of 21.13% on March 31, 2017. Yet they did receive a really nice dividend of 78¢ on July 6, 2017. That was up from 71¢ on July 7, 2016, which makes Disney a wonderful dividend.

Both Disney and Verizon are good stocks but Verizon is definitely a value bargain right now. If you need to add a moneymaker to your portfolio Verizon would be a pretty good deal.

Why Buying Disney would be Dumb for Verizon

There are several reasons why buying Disney would actually be a bad idea for Verizon. Reasons why a Disney acquisition would be a dumb move for Verizon include:

• Disney would be very expensive. It had an enterprise value of $185.32 billion on July 18, 2017. That means it would take most of Verizon’s resources to buy out the Magic Kingdom. Sounds pretty dumb to me, especially if Bog Iger would put up a fight which I imagine he would.

 

• There are cheaper and better acquisitions for Verizon out there. An obvious one is Netflix (NASDAQ: NFLX) which had an enterprise value of $79.18 billion and a market capitalization of $72.37 billion July 18, 2017. Netflix is also burning money like crazy it reported losing $1.589 billion in cash from operations on March 31, 2017.

Other potential acquisitions for Verizon (and Disney) include:

 

• CBS (NYSE: CBS.A) – The TV network reported a market cap of $26.48 billion and an enterprise value of $35.27 billion on July 17, 2017. It also has little float reporting an net income of $536 million and cash and short-term investments of $163 million on March 31, 2017. CBS would give Verizon access to some big pop culture properties; including Star Trek, and access to the network’s vast video library.

 

• Time Warner (NYSE: TWX) – This company; which controls Warner Brothers and DC Comics, reported a market capitalization of $76.83 billion and an enterprise value of $98.70 billion on July 17, 2017. Time Warner also reported $29.74 billion in revenue, $1.45 billion in cash and short-term investments, and $4.136 billion in income on March 31, 2017.

 

• Twitter (NYSE: TWTR) – Yes it’s a sleaze pit that loses money like crazy (Twitter reported a “net income” of -$438.70 million on March 31, 2017) but the social media service also reported 328 million users at the end of first quarter 2017, according to Statista. Verizon can pick up that for around $14 billion. Netflix had a market cap of $14.51 billion and an enterprise value $12.19 billion July 18, 2017. Owing Twitter would give Verizon a big social media presence and new ad revenue for Yahoo.

• Snapchat (NYSE: SNAP) – The social media upstart had 166 daily active users at the end of first quarter 2017, Statista reported. This company was also fairly cheap with a market capitalization of $17.61 billion and an enterprise value of $14.60 billion on July 17, 2017. Snapchat would give Verizon a social media presence without Twitter’s baggage or political ramifications.

 

• Any attempt by Verizon and Disney to merge would attract political heat and the attention of the Federal Trade Commission. The FTC is feeling emboldened by its successful delay of the Walgreens-Rite Aid merger so it is likely to block a big telecom merger. There would also be high level political problems; President Donald J. Trump (R-New York) was a major critic of last year’s proposed Comcast-Time Warner merger.

As you can see a Verizon-Disney merger was a silly notion. This story should also be a cautionary tale for investors, always scrutinize media reports carefully and check the financials before believing media reports. They are likely to be little more than hype, which is not a very good basis for a stock transaction.