Walt Disney Co. (DIS, Financial) and Twenty-First Century Fox (FOXA, Financial), two major entertainment companies, traded lower on Wednesday. The latter reported earnings that slightly missed analyst estimates.
Disney and Fox file proxy statement on merger
On April 18, Disney and Fox filed a proxy statement regarding their proposed merger announced on Dec. 14, 2017. Per the merger terms, Disney will acquire Fox’s shares at an exchange ratio of 0.2745 Disney shares per Fox share, or approximately $52.4 billion in stock.
Fox mentioned in its earnings release that the company will spin off its broadcasting and sports TV network businesses as a separate company prior to the merger. Fox’s separation and merger with Disney are subject to approval from shareholders, various regulatory institutions and the receipt of a tax ruling from the Australian Taxation Office. The transactions are expected to close approximately 12 to 18 months from the announcement date.
Disney’s earnings summary
Disney reported diluted earnings of $1.95 per share for the quarter ending March 31, up 45 cents from the prior-year quarter. Adjusted earnings of $1.84 per share outperformed analyst estimates by approximately 10 cents.
CEO Bob Iger said strong results in parks, resorts and studio businesses contributed to results “reflecting [Disney’s] continued ability to drive significant shareholder value.” Parks and Resorts revenues increased 13% year over year, driven by several factors, including increased guest spending and attendance growth at Walt Disney World Resort, Disneyland Paris and Hong Kong Disneyland Resort.
GuruFocus ranks Disney’s profitability 9 out of 10 as the company has strong profit margins and returns. Disney’s operating margin, which has increased approximately 4.7% per year over the past five years, outperforms 89% of global diversified media companies.
Iger discussed in the earnings call that Disney’s “recent reorganization” expects to create a “more effective, global framework” to promote growth and maximize shareholder value. The CEO said Disney organized its business into several divisions, including three “primary content divisions” and a fourth division that focuses on physical goods and experiences. Iger said the company reorganized the business in March, “well ahead of the Fox acquisition” so that its business structure aligns with that of Fox upon merger completion.
Fox
Unlike Disney, which reported earnings that beat analyst estimates, New York-based Fox reported earnings of 47 cents per share, down approximately 5 cents from the consensus estimate.
Revenues of $7.42 billion declined 2% from the prior-year quarter primarily due to the absence of advertising revenues from the 2017 Super Bowl. Quarterly operating income before depreciation and amortization also declined 2% from the prior-year quarter, reflecting lower contributions from the Television and Filmed Entertainment segments and a $60 million charge for “higher compensation expenses” due to the modification of equity awards stemming from the Disney merger.
Fox’s profitability ranks 7 out of 10: although the company’s operating margin outperforms 86% of global competitors, its three-year revenue growth rate of 3% ranks higher than just 53% of global diversified media companies. GuruFocus ranks Fox’s business predictability one star out of five as the company posted negative earnings before interest, taxes, depreciation and amortization around 2009. On the other hand, Disney’s business predictability ranks a solid 4.5 stars.
Disclosure: No positions.
