02 Mar Morris Esformes on Breaking Down the Disney / Fox Merger
As a huge fan of the Marvel Cinematic Universe (or MCU), I was excited about the news of a Disney buyout of 21st Century Fox. A portion of this excitement extends from the fact that the MCU, would finally have access to fan favorite Marvel properties, such as the X-Men and the Fantastic Four. Up until now, Fox has controlled the movie licenses for these superhero properties, and much of their film output has been met with criticism by both critics and fans alike. Disney, and Marvel Studios, could now extend their seemingly midas touch to these series, and incorporate them into the MCU.
Breaking Down the Finances
As a student studying finance, the complexities involved in massive mergers and acquisitions (M&A) always interest me, so I decided to do a little digging and see what other implications could come from this buyout. The massive merger between Disney and 21st Century Fox is a unique situation with many moving parts and financial implications.
According to a press release issued by The Walt Disney Company, Disney is expected to pay a total of $35.7 billion and issue 343 million new shares to 21st Century Fox shareholders in order to own a 19% stake in Disney on a pro forma basis.
In addition, Disney will assume about $13.8 billion in net debt from 21st Century Fox, which brings the total equity value to $71.3 billion and the total transaction value to $85.1 billion, assuming no tax adjustment is applied.
Claims of Reduction in Industry Competition
Opponents of the acquisition claim that the vertical merger will significantly reduce competition and quality of content. The Brazilian antitrust regulator Cade issued a report claiming the merger could “potentially reduce the quality and diversity of the sports content available, besides raising costs that could be passed on to consumers.” Disney has been granted approval by China and the European Commission, however, they will still need approval from Brazil before a deal can go through.
Brazil’s focus on sports also highlights the impact that this merger could have on the many different entertainment industries influenced by each of these massive companies. In cases like the previously mentioned Marvel Universe, there seems to be nothing but benefits for the consumer. But in the sports industry, of which Fox owns a significant number of regional sports network (RSNs), the merger could have a negative impact. The situation involving RSNs is constantly shifting, with Disney shopping the 22 channel package as part of requirements set by regulators (due to Disney’s ownership of ESPN). The issue has multiple layers, but with Fox announcing it will not repurchase the RSNs, the deal may alter the future of local sports broadcast. Disney may be allowed to spin off the RSNs or they may piecemeal the channels instead of selling them off as a package. One concern is that without the influence of Fox behind them, many of these RSNs may find themselves dropped from cable carriers basic tiers.
Another significant issue stemming from the merger is the overall influence on the entertainment industry. The merger would officially reduce the number of major American film studios from six to five. Numerous media personalities have expressed concern over the scale of influence this would give Disney over the entire industry. Film critics may now have to watch their words for fear of being shut out over negative press. Disney has a reputation for wielding their power and holding their influence over media outlets and movie theaters.
Another Outlook on the Future of Disney
While most analysts have focused on the benefits this merger would provide Disney (expanded IP and greater industry influence) other experts have highlighted the narrative that this deal’s true focus revolves around Disney’s upcoming streaming service. Under the leadership of Bob Iger, Disney plans to roll out their own streaming service, Disney+, in an attempt to challenge Netflix, the industry leader. Analysts say challenging Netflix, and other streaming services, is the primary reason behind the acquisition of 21st Century Fox. Iger has agreed to stay on as Disney’s chief executive until 2021–two years after his planned retirement date. This extension, and consistent leadership, would help ensure a successful launch.
I also found the uncertain fate of The Simpsons particularly interesting. The longest running American television show of all time has become a financial burden on Fox in recent years, but the network was able to recoup much of its money on the back-end syndication. Now that The Simpsons will be a Disney property, Fox will no longer have access to their share of the profits, and they will also be forced to pony up for the full licensing cost for airing new episodes. Reports claim that Disney could rake in serious profits from discontinuing the show and negotiating a new syndication deal.
The merger coupled with the recent sweeping layoffs of duplicative staffers, that almost seems inevitable, is making many people concerned. However, with last year’s completed merger of AT&T and Time Warner it seems that, for better or for worse, this deal is going through.