Walt Disney (NYSE: DIS) has an agreement to acquire significant assets from 21st Century Fox (NASDAQ: FOX) (NASDAQ: FOXA), including its movie and television studios, numerous film properties, and certain cable networks. In exchange, Fox shareholders will receive shares in Disney valuing the deal at $52 billion. But now, Comcast (NASDAQ: CMCSA) has signaled that it is putting together its own financing for an all-cash offer that could be worth more than $60 billion.
In this segment from Industry Focus: Consumer Goods, Vincent Shen is joined by Motley Fool contributor Daniel Kline as they discuss the outlook for a Comcast counteroffer. Of course, no matter who closes the deal for these Fox assets, there are major regulatory hurdles to overcome with clues from the ruling on the merger of Time Warner and AT&T.
A full transcript follows the video.
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This video was recorded on May 29, 2018.
Vincent Shen: There have been two stories this week that I wanted to talk to you about for this show. The first is the emergence of Comcast with a serious counteroffer for the 21st Century Fox assets that Walt Disney originally claimed in the big deal that they announced back in December.
Dan Kline: Well, it’s like a promise ring before an engagement. They haven’t made an offer. They’ve just said, “Hey, we’re going to make an offer, and it’s contingent on the AT&T- Time Warner merger
and how the tea leaves read on that one.”
Shen: We’ll get into all those details. Before we break into the latest developments, I want to take a minute to just recap the deal between Fox and Disney, because there’s some important context there as we compare that agreement to what Comcast might ultimately offer. Late last year, for weeks, there were reports that multiple companies, including Disney, Comcast, Verizon, Sony, I think a few others, they were expressing interest, at the time, in acquiring this basket of assets from Fox.
Ultimately, Disney was the one to announce a deal. The key highlights from that agreement: the deal would see Disney take over Fox’s film and TV studios, including a large portfolio of franchises, TV series, sports content, and other properties that Disney could use to bolster their two streaming services that they’re going to be rolling out to consumers. On top of that, there are some cable networks like FX, National Geographic, that’s also included, plus international TV assets, so STAR in India and Sky in Europe. Those would give Disney a much bigger international presence and help diversify the business.
Then, the Fox broadcast network — Fox News, Fox Business, and a few other networks — those would not be part of the deal. They would get spun off into a separate company.
In exchange for the assets that Fox shareholders would be giving up, they’d get 0.2745 shares of Disney for each share of Fox that they hold. At the time of the announcement, that amounted to a value of about $29.54 per share for Fox investors in a $52 billion transaction.
Then, something else to keep in mind is that Disney CEO Bob Iger would be delaying his retirement for a fourth time to 2021 so he can head up the planned integration of the two businesses.
Kline: His retirements are like Elton John. [laughs] You really shouldn’t believe it when he says it’s going to happen. I think the one thing you didn’t mention that’s pretty important as part of this is the movie franchises. Yes, there’s theme park applications, there’s television shows. But for Disney, one, there’s returning rights to some of the Marvel properties that it already owns, which when you see the amount of money Avengers made, which is the biggest movie ever, following Black Panther, which was the biggest movie ever until Avengers came along … so you’re going to see Deadpool and the X-Men and a lot of things that make more sense at Disney than they might someplace else.
Shen: Yeah, big opportunity there. Also, something else I didn’t mention is Hulu, consortium of these different entertainment companies, with the Fox stake, combined with what Disney already holds, will have a controlling stake in Hulu. That’s one more streaming service for them to leverage as they move more into that space.
Kline: It could actually change Disney’s overall strategy to having its services, then, with the live TV component of Hulu, theoretically, this gives Disney an end-around if the cable industry falls apart that it would control. Which is an antitrust issue, as well.
Shen: This is a huge deal, it would give Disney an even tighter grip over the more traditional Hollywood and entertainment worlds. There are two things investors can expect to accompany this deal. One, lots of regulatory scrutiny; and two is the potential for competing offers.
On the regulatory side, the business world — you mentioned this earlier — is right now awaiting the final word on the AT&T Time Warner merger. The judge on that case should be ready to announce his decision by mid-June. What that decision ultimately is should give us some clues as to what we can expect for any deal, regardless of who the buyer is, for the Fox assets.
Kline: It’s also worth noting that Disney has to pay Fox $2.5 billion if the deal breaks apart for regulatory reasons.
Shen: Yes. The competing offer is very relevant right now just because there’s reports that Comcast is in the final stages of preparing this deal to bring to the table.
Kline: They’ve lined up the cash, is the important part.
Shen: And various sources right now are claiming that the Comcast deal will be an all-cash transaction, so, different than the stock deal that Disney offered. And it will top out, in terms of value, over $60 billion. That will definitely raise the stakes.
Keep in mind that this is not the first offer that Comcast has made to Fox. Before Disney and Fox announced their deal, Comcast made their own offer, but leadership at Fox showed little interest because of a few concerns. One would be that Comcast would have a tough time getting the deal approved. Then, apparently, they also offered a relatively small breakup fee. Disney put up $2.5 billion. I think Comcast was much lower than that.
Kline: $1.5 billion if it’s for any reason other than regulatory.
Shen: Yes, for either company to walk away from the deal. The breakup fee is usually paid by the acquiring company if the deal fails to go through, especially for regulatory reasons. So, Disney is on the hook for $2.5 billion if, for example, regulators do end up blocking a deal between Disney and Fox.
Looking ahead, until we have the official details behind this Comcast offer, there are a few things that we think listeners should keep in mind. First is that Fox shareholders should be pretty happy, because in their ideal world, Comcast will toss up a generous $60 billion-plus offer that forces Disney to bump up their own deal, and then maybe some type of small bidding war ensues. We’ll see what happens there. Then, second, regardless of who Fox decides to go with, there will definitely be those antitrust challenges. Both Comcast and Disney have businesses that overlap pretty significantly with Fox, so there’s no solely horizontal argument to be made here.
Then, the last thing, the eagerness, I think, with which both of these companies are going after the Fox assets should definitely signal to investors how important and how much of a priority it is for these traditional entertainment companies to essentially sure up their businesses as they compete with the upstart tech companies and platforms like Netflix. It’s gradual, but there’s definitely a shift in how people are consuming their entertainment. Comcast and Disney, I think they very much want to be at the forefront of the developments there and have all the tools that they can at their disposal to address the challenge.
Daniel B. Kline has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool owns shares of Verizon Communications. The Motley Fool has a disclosure policy.