Walt Disney Co. (DIS, Financial) is open to offering cash as a part of its $52 billion deal to acquire some assets of Twenty-First Century Fox Inc. (FOXA, Financial), the media empire controlled by Rupert Murdoch.
CNBC reported on Tuesday that Disney is securing financing in case the company's board demands cash for its media assets. Disney agreed to buy the assets last year with an all-stock offer valued at $52.4 billion. As Comcast (CMSA, Financial) might be preparing to pitch an all-cash bid, Disney is gearing up to offer cash compensation for the invaluable media assets as well.
The deal comes at a time when AT&T (T, Financial) is in court fighting to acquire Time Warner (TWX, Financial). CNBC notes Comcast is bidding for Fox’s assets in case the federal judge rules in favor of AT&T.
Although Disney’s plan to offer cash is indicative that AT&T might get the green light for its $85.4 billion takeover of Time Warner, the AT&T deal is less likely to go through. Herbert Hovenkamp, a well-known Wharton professor, thinks President Trump will succeed in blocking the deal. He believes the government has to prove that AT&T and Time Warner can boost their profits amid the merger. He further added that “proving the intent” is irrelevant as far as the ruling goes. It seems Comcast won’t be able bid for Twenty-First Century Fox after all.
Points of interest
- Online streaming is taking its toll on traditional media companies.
Murdoch’s willingness to sell the business is indicative of the disruptive nature of online content streaming and how it’s challenging the traditional Hollywood business. “Are we retreating? Absolutely not. We are pivoting at a pivotal moment,” Murdoch said on a conference call last year.
Although Murdoch says it’s more of a pivot than a retreat, it’s clear the company is shying away from competing against the new norm of online streaming. Murdoch’s decision to keep the core news and sports business indicates the company is backing away from entertainment streaming competition. “Not included in the acquisition: Fox News, the Fox broadcast network and the FS1 sports cable channel,” noted the New York Times. - Some media companies aren’t giving up.
Comcast’s willingness to fight Disney for the prized assets of Twenty-First Century Fox highlights the online streaming opportunity that exists. The consolidation interest presents an opportunity for conventional media companies to compete against streaming players like Netflix (NFLX, Financial). Disney has already announced its plans to introduce two streaming services by 2019. One of these steaming services will include content from Marvel, Lucasfilm and Pixar, complemented by the streaming service Hulu. - Disney is likely to steal it away from Comcast.
One of key reasons the Disney-Fox deal might not be blocked by the U.S. Department of Justice is the increasing domination of Netflix in the streaming space. The justice department might see this as a healthy increase in competition rather than a merger of two competing giants. Moreover, as Comcast’s bid is conditional on AT&T’s acquisition of Time Warner, Disney might be in the clear as the AT&T deal is unlikely to go through.
Online streaming will remain a content-intensive business
Netflix is already spending billions on content creation and licensing. The company is set to spend $7 billion to $8 billion on content in 2018. With the rise of standalone streaming from the likes of Disney, original content spending is expected to trend even higher going forward.
More importantly, Netflix might not turn out to be the future hub of entertainment as most think. Due to the rise of competing content and standalone streaming services, Netflix will have to differentiate on original content. Focus Equity, an independent equity research firm, noted the following in one of its research reports:
“Netflix will turn into a content creator with a streaming distribution channel, rather than a streaming hub with a two-sided market. Therefore, caution should be exercised in valuing Netflix as a hub for entertainment. It should rather be valued as a network with quality content and growing subscriber base.”
Players like Disney won’t have any compelling reason to license their content to Netflix due to having their own streaming service. As Disney has a lot of content under its umbrella, it will potentially turn out to be a viable competitor to Netflix. The point is Netflix should not be valued as a future hub of entertainment content; rather, it should be considered a content creator with a state-of-the-art online distribution network.
Takeaways
Although Disney’s plan to prepare a cash deal for Twenty-First Century Fox suggests the AT&T-Time Warner deal might not be blocked, it might simply be a precaution. The AT&T-Time Warner deal seems unlikely given the high interest the Trump administration has taken in blocking the deal.
The Disney-Twenty-First Century deal, on the other hand, is expected to go through as it could be a competitor to the only major streaming player. A bid from Comcast is unlikely.
As Disney completes the acquisition, it will have more content under its umbrella to challenge Netflix as a standalone streaming service. This development will take the content-hub crown away from Netflix. However, Netflix will continue to flourish amid high-quality content creation. Nonetheless, Netflix’s stock does not offer much value at the current price.
Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.
