I penned an update on 21st Century Fox (FOX, Financial) (FOXA, Financial) after quarterly results in February. That article was mostly focused on the company’s recent financial results as opposed to the pending deal with The Walt Disney Co.(DIS, Financial). In the conclusion, I said the following:
“Fox is my preferred route to a stake in Disney. I opened my position in Fox in late 2016 and haven’t done anything since. That changed on Thursday afternoon when I bought some more shares of Fox. If this recent market volatility becomes more than just shaky knees, there’s a good chance I’ll be buying more in the near future.”
It was quiet for the next few months, but then things got interesting. In early June, Fox shares started moving higher on speculation that Comcast (CMCSA, Financial) might try to take a run at the company, particularly if AT&T (T, Financial) won its legal battle against the Department of Justice in the proposed acquisition of Time Warner. When the judge ruled in AT&T’s favor, Comcast acted swiftly: the next day, Comcast formalized an all-cash bid for Fox worth $65 billion, or $35 per share. The offer was a nearly 20% premium to the Disney offer of $52.4 billion.
A week later, Disney jockeyed back into the pole position with a $71.3 billion bid for Fox (roughly 35% higher than their initial offer and roughly 10% higher than the Comcast bid). As opposed to the initial bid, which was a 100% stock deal, the new structure gives Fox shareholders the option to elect cash or shares of Disney (as noted in the press release, the consideration is “subject to proration to the extent cash or stock is oversubscribed”).
As I noted in my last article, my preference is my stake in Fox will become a position in Disney. I think the combined company would be a high-quality business with plenty of opportunities to get back on the front foot in the years to come. In addition, I think Disney, on a standalone basis, is undervalued. For that reason, I’m quite fond of the idea of being paid in Disney shares (my hope is that under the new deal, if it goes through, I’ll receive a 100% allocation of Disney and no cash).
That sentiment seems to be shared by the executives at 21st Century Fox. Here’s what CEO James Murdoch had to say about the first Disney deal at the code conference in May:
“We have an agreement with Disney that we find very attractive for our shareholders. It’s an all stock agreement and we think the prospects for the new firm are very strong… the combination of these firms is something that we think is very attractive.”
Whether Disney will be the buyer for the Fox assets is to be seen. The special shareholder meeting to vote on the proposed deal has been set for the end of July. If we’re going to hear anymore from Comcast, it’s likely to happen in the next couple of weeks. From my perspective, I think there’s reason to believe Brian Roberts isn’t ready to wave the white flag on this one.
During a recent appearance on the podcast “Recode Media with Peter Kafka,” Wall Street Journal media reporter Keach Hagey discussed the fight between Comcast and Disney for Fox. When asked by Kafka who ends us walking away with the Fox assets, here’s what Hagey said:
“It does seem like Disney has the upper hand right now… I’ve also been talking to people about Brian Roberts. They believe he’s not going to stop… [they believe] he is going to bid a silly amount of money.”
Steve Burke, the CEO of NBCUniversal, put a slightly different spin on it:
“Brian never gives up. We have worked on a lot of deals together and he just out-hustles everyone. He's a very persistent guy...”
Conclusion
As I see it, here’s where we stand as Fox shareholders. There’s an offer from Disney for certain Fox assets at $38 per share. In my opinion, if that deal gets done, the intrinsic value of those shares will be quite a bit higher than $38 per share (because the combined company will be worth a lot more than $105 per share of Disney stock). But for the sake of this discussion, and because half of the deal is paid in cash, let’s assume intrinsic value is in line with the deal price.
From today’s stock price of $49, that leaves $11 per share to account for. By my math, the stub should earn somewhere around $1 per share in free cash flow as a standalone business. If you think it’s reasonable to pay 11 times free cash flow for New Fox, then you’ve fully accounted for the current valuation. Even if the bidding war is done, you can argue that today’s price is reasonable.
What that means to me is you’re left with upside if Brian Roberts truly does come back with a “silly” offer. Personally, I’m of the opinion that Disney will almost certainly make a counter in that scenario, even if it doesn’t match the headline value of the Comcast bid. Time will tell if Comcast wants to take this a step further. Personally, I think this scenario is more likely than not. How far the bidding war could go is anybody’s guess. If both parties want the Fox assets badly enough, I think there’s room for this to go quite a bit higher.
For what it’s worth, here’s the take of analyst Rich Greenfield from BTIG:
“We continue to believe there are no obvious acquisition alternatives for either Disney or Comcast. In turn, we expect bidding for the Fox assets being pursued to move higher, with an ultimate acquisition price of $45-$50 likely.”
That seems like a reasonable assumption in my mind. At the low end of that range, and assuming New Fox is worth approximately $10 per share, that’s $55 of value (about 12% above current levels). That’s a long way of saying that despite a sizable run for the stock over the past eight months, I think the risk-reward on Fox shares is still attractive at today’s price.
Disclosure: Long FOX, FOXA and CMCSA.
