Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Should Disney buy 21st Century Fox?

The Walt Disney Company Co (NYSE: DIS) is marching dangerously close to domination over American entertainment and popular culture. News reports indicate that Disney has bought 21st Century Fox (NYSE: FOX) for $66 billion.

21st Century Fox is a grab bag of media and entertainment properties assembled by Australian-American mogul Rupert P. Murdoch. It includes the Fox broadcast TV network, the much-maligned Fox News, a number of cable channels including FX, and the historic movie studio 20th Century Fox, among other assets.

20th Century Fox is one of the big six global movie studios with a box-office gross of $7.9 billion according to Quartz. Walt Disney Studios is currently the most successful of the Big Six with a gross of $17.1 billion. That would give Disney a worldwide box office gross of $25 billion.

Here’s part of What Disney will get by buying Fox

It is easy to see why Bob Iger is interested in 21st Century Fox. Buying it would give Disney Fox’s movie and TV library and some valuable pop culture properties.

Fox’s assets include the movie and TV rights to Marvel Comics’ most successful superhero team the X-men,[i] another a-list Marvel Superhero; The Wolverine, The Simpsons, Deadpool, The X-Files, Kung Fu Panda, Independence Day, Alien, Assassin’s Creed, The Kingsmen, Planet of the Apes, Buffy the Vampire Slayer, Angel, Firefly, and a variety of other franchises. There’s also a library of classic movies and TV shows including Butch Cassidy and the Sundance Kid, 24, Archer, The Shield, and MASH.

Adding all those titles to the video library would generate a lot of revenue for Disney. One potential use for them would be to create a global video distribution platform to rival Netflix (NASDAQ: NFLX). A smart next move at Disney would be to buy Netflix.

There’s also 39% of Britain’s Sky Plc TV, sports including NASCAR and NFL football, and numerous new distribution channels via satellite, Bloomberg reported. There is also obvious symmetry here; Hugh Jackman’s Wolverine might pop up in the next Avengers or Captain America movie and Deadpool might start hassling Spiderman.

Disney Taking Risks by Buying 21st Century Fox

Disney takes some huge risks with such an acquisition. An obvious one is an anti-trust action, propelled by President Donald J. Trump (R-New York) who has already been hostile to such media mergers.

Disney Human Resources personnel depart for 21st Century Fox.

Trump might oppose such a merger to keep the reliably conservative, nationalist, and populist Fox News from falling into the hands of the “liberal” Disney Empire. A likely outcome here is that 21st Fox would sell Fox News or spin it off into another company.

Potential buyers for Fox News include rightwing billionaires like the Koch Brothers and Sheldon Adelson. That might generate a few more billion dollars for Disney, making Bob Iger an even shrewder deal maker. Disney might have to agree to sell off Sky and the British properties as well.

There is also likely to be popular reaction will Buffy; or Simpsons, fans tolerate the prospect of their beloved characters becoming “Disneyfied?” The thought of seeing a Sunnyvale house of horrors at Disneyworld; or Bart and Lisa walking around Disneyland, makes me cringe I imagine I’m not the only one. So far fans have tolerated Disney’s version of Star Wars but for how much longer.

Is 21st Century Fox Making Money?

A final and important question to ask is why is the Murdoch family liquidating 21st Century Fox? Is it losing money, or are they simply sick and tired of the entertainment game?

21St Century Fox is making money right now; it reported an income of $2.986 billion on September 30, 2017. That income is up slightly from $2.901 billion in September 2016, but down dramatically from $7.944 billion in September 2015.

21st Century Fox is capable of making money, but its money-making capacity has fallen dramatically. So why does Disney want 21st Century Fox, besides buying back some Marvel film rights?

Why is Disney Buying 21st Century Fox?

An obvious answer is revenues at 21st Century Fox which are growing. Fox reported $29 billion revenues on 30 September up from $27.75 billion in September 2016.

There’s also some cash at 21st Century Fox, the company reported a free cash flow of $667 million on September 30, 2017. That was down from $927 million in September 2016. Fox also generated $3.543 billion in cash from operations in September 2017, that was down from $4.343 billion in September 2016.

So it is easy to see why the Murdoch clan wants out, Fox is generating less cash but still carries a lot of float. Cash and short-term investments were strong at $6.901 billion on September 30, 2017. That was a substantial improvement over $4.681 billion in September 2016.

This indicates that Disney can make a lot of money out of Fox, and get a lot of value from it. The company had assets of $52.03 billion on September 30, 2017, and an enterprise value of $77.59 billion on 15 December 2017.

That means a Disney purchase of 21st Century Fox for $60 billion; a little over the $63billion billion market capitalization achieved on December 15, 2017 is a smart move. The $66 billion purchase price reported by some media outlets is certainly questionable. In Iger’s defense that price, is well below the 15 December 2017 enterprise value of $77.59 billion.

Even if Disney ends up selling Sky and Fox News, it would make a lot of money from 21st Century Fox. Bob Iger was absolutely correct in his effort to buy Fox, it will add a lot of value to Disney, even if some of us will not like the deal.

[i] Marvel Comics sold the movie rights to a number of characters; including the X-Men and the Fantastic Four, in an effort to raise cash and keep out of bankruptcy years ago. Marvel, now part of Disney, has the right to publish X-men and Wolverine comic books but not make X-men or Wolverine movies.