As a studio, Fox is in a clear slump, and it is difficult to see the Fox content moving the needle on filmed entertainment at the new Disney. Disney is about to release The Last Jedi, a surefire hit that I believe will outshine its predecessor, The Force Awakens, as the top-selling movie in terms of all-time global box office receipts. In contrast Fox has been unable to produce hits recently, with none of its films featuring in the 2017 global box office top 10 (Logan is currently #11.) It is clear that Disney CEO Bob Iger is looking for quantity over quality.
That’s the key factor: As Disney looks to launch its own over-the-top network in 2019, having a critical mass of popular franchises is key. After the deal closes, Disney will control movie franchises such as Avatar, X-Men, Deadpool and the Fantastic Four. Just as importantly, Disney gains control of Fox’s TV studios, which created The Simpsons and Modern Family.
So that’s the calculus here. The deal is clearly dilutive to DIS shareholders in the short-term. Disney’s press release included management’s forecast that the purchase of Fox assets will be “accretive to earnings before the impact of purchase accounting for the second fiscal year after the close of the transaction.”
When there are that many weasel words in a guidance paragraph, an analyst knows that management is not confident on the financials of the acquired company. Also, Disney’s projection of “at least $2 billion” in cost savings from the Fox deal tellingly does not include a time frame. I think that’s a stretch. If anything, I believe Disney will likely end up spending incremental dollars, not saving them, to try and grow the Sky and Star India businesses that were languishing in the Fox corporate family.
Obviously, though, for Disney this deal is about assets, not earnings per share. Currently there are five major studios globally, with Lionsgate and Paramount occupying what I would classify as strong second-tier positions. After this deal, obviously, there will only be four first-time filmed entertainment providers, and Warner Brothers Universal and Sony/Columbia will have to deal with an Evil Empire that will eventually control its own version of a Death Star, a direct-to-consumer network.
So Netflix’s dominance is challenged, and I believe that Netflix is the big loser in the Disney-Fox deal. At 17.2x analyst consensus for 2018 EPS, Disney shares are not particularly expensive. Finally clinching the Fox deal (actual closure is expected by June 30, 2018) will allow Disney management to shift shareholder focus from the sinking ship that is ESPN to the high-quality stable of filmed entertainment properties that are controlled by the combined entity. Content is still king.