Roundtable: Is the Disney-Marvel Deal a Winner?

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Move over, New York City: Spider-Man will be coming to rescue the citizens of The Magic Kingdom from now on. Yes, Disney (NYSE: DIS  ) announced yesterday that it will purchase Marvel Entertainment (NYSE: MVL  ) for $4 billion in a combination cash-and-stock deal. The news sent Marvel shares soaring and Disney shares down slightly.

We couldn't let the big news go without assembling a Foolish roundtable to debate a pair of questions surrounding the acquisition. First up, our contributors will discuss whether the 29% premium Disney paid was too much. After that, they'll examine the potential synergies Disney can unlock to make the deal a success.

Face front, True Believers, and get ready for a lively debate.

Did Disney overpay for Marvel's assets and intellectual property, or did Disney snatch up an undervalued company that will be a potential revenue driver for the Mouse's empire? 

Tim Beyers, Motley Fool writer and Rule Breakers analyst: Disney probably paid as much as it could. Any more, and there would have been no deal. And I would have been fine with that.

Why? Take a look at the segment data. Marvel Studios, on the strength of one blockbuster in Iron Man and a mediocre draw in The Incredible Hulk, produced almost $130 million in operating income over the past year. Tax that at 40% and assign a modest multiple of 10 times earnings, because of the uncertainty of the movie business, and you're left with a division worth $779 million all by itself. Disney's price conservatively values the remainder at roughly $3.2 billion, equal to 17 times trailing earnings.

Marvel's operating income was growing 28% a year on average before anyone had seen Robert Downey Jr. wow audiences as Tony Stark. Mr. Market would have paid up for that sort of growth eventually, and at far more than $50 per share.

Charly Travers, associate advisor, Million Dollar Portfolio: Christmas came early for Marvel shareholders, as Santa Disney brought them a beautiful gift. Marvel does not generate anywhere near as much cash as a simple free cash flow calculation would indicate. All the money borrowed to make a film -- money that must be repaid from film proceeds -- cannot be ignored, because that cash is not available to shareholders.

Once you factor this in, it becomes apparent that Marvel's movie segment is nothing more than a shell game that moves money from one place to another while never generating any value for the firm.

Rick Munarriz, Motley Fool writer and Rule Breakers analyst: Folks thought that Disney overpaid for Pixar three years ago, but that was before Disney began enhancing the value of Pixar's character library through theme-park attractions and online games.

You don't find too many critics of the Pixar deal these days, and that took place at richer multiples than yesterday's Marvel deal.

How do you see Disney integrating Marvel and unlocking potential synergies? 

Beyers: Disney is the world's largest licensor but Marvel is fourth, beating big names such as Mattel (NYSE: MAT  ) , Ford (NYSE: F  ) , and Playboy Enterprises (NYSE: PLA  ) . Together, these two could become the world's most profitable licensing imprint.

There's plenty of room for growth. By my math, Disney tends to earn a 10% royalty rate on its licensed properties. Marvel gets 5% today, but it'll get more as a Disney business unit. The Mouse commands a premium because its theme parks, retail stores, and broadcast properties offer an unmatched marketing and distribution machine.

Travers: Maybe we'll see Silver Surfer hosting SportsCenter. At a purchase price that is 20 times Marvel's guided EBITDA for '09, Disney needs a heck of a lot of "synergies" for this deal to make sense.

Munarriz: This move fills a serious void in the Disney lifeline. Kids love Mickey, Minnie, and Buzz Lightyear. Preteen girls swoon over the Jonas Brothers and any bubblegum pop from the Disney Channel.

Then we hit the teen years, and Disney doesn't catch up with that group -- particularly young males -- until they come around a decade later as parents. Sure, Disney has ESPN, but there is little exclusivity in sports programming.

Marvel will help Disney enormously on that front, with the live-action hooks that have been missing since the Pirates of the Caribbean trilogy came and sailed.

It will get a little thorny in the theme parks, where the rival Universal Orlando resort -- owned by Blackstone Group (NYSE: BX  ) and General Electric (NYSE: GE  ) -- apparently has theme-park attraction rights to the marquee Marvel characters east of the Mississippi.

That will change. I can't imagine Universal willingly fattening the coffers of a rival for too much longer.

At the end of the day, it's going to be harder to outgrow Disney with Marvel on its side.

Whether you like what you heard or disagree with one of our contributors, let us know in the comments section below. Or have a look at some other Foolish roundtables:

Disney and Marvel are Motley Fool Stock Advisor recommendations. Disney and Coca-Cola are Motley Fool Inside Value recommendations. Coca-Cola is also a pick of our Income Investor service. Try any of our Foolish newsletter services free for 30 days.

Fool editor David Williamson loves a good debate and enjoyed putting this roundtable together. He owns shares of General Electric and more Spider-Man comics than he cares to admit. He also will take a moment to shamelessly plug the must-read "Editors' Desk" blog. The Motley Fool is also on Twitter as @TheMotleyFool. Don't make the Fool's disclosure policy angry. You wouldn't like it when it's angry.

Read/Post Comments (16) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 01, 2009, at 1:47 PM, mikecart1 wrote:

    Disney killed Spiderman.

  • Report this Comment On September 01, 2009, at 1:51 PM, plange01 wrote:

    with the US just starting its 9th month of a depression it will be 3-5 years before disney sees a rise in people visiting its theme parks....

  • Report this Comment On September 01, 2009, at 2:08 PM, TideGoesOut wrote:

    I have been to Disneyland and don't care to go again, but if this created a superhero-themed amusement park, I would definitely go. I can't think of a vacation I'd prefer more.

    Anyway, I suspect there will be no damage to Marvel. Disney knows what it's worth, and aren't going to waste it by messing with a good formula.

  • Report this Comment On September 01, 2009, at 2:24 PM, catoismymotor wrote:

    MVL was a great and growing business. Left on its own it would have continued to prosper and increased the wealth of its shareholders. For those who have yet to sell I recommend you do so, and fast. Find another entertainment company that is growing like Dolby or Imax.

    Disclosure: I don't own any Imax, Dolby, Marvel or Disney shares.

  • Report this Comment On September 01, 2009, at 3:05 PM, HasOrHasNot wrote:

    I agree with Munarriz the most. In terms of the financial numbers (movie revenue, EBITDA maneuver, etc), it will not matter 3 to 5 years down the road because of the rich character inventory.

    The only threat to this deal is Disney's lack of experience on the teen market. When the kids become teens, will they continue to think Disney is "cool"?

    Best if they just let the Marvel personnel to keep doing what they do best, and they go in to standardize all financial reporting. More importantly, they better do not destroy its intellectual properties (unlike what a mega insurer is doing right now).

  • Report this Comment On September 01, 2009, at 4:15 PM, Juanesuncrack wrote:

    Marvel is a very cool brand and the comics are a very important part of my life. I think there is a risk of losing that kind of cult feeling with this buy. Most of marvel followers are going to hate watching their heroes movies with the disney logo at the start of the film...but on the other side, Disney people are not stupid and im sure they will let the marvel guys continue their outstanding work.

  • Report this Comment On September 01, 2009, at 4:57 PM, memoandstitch wrote:

    If they put Marvel characters in Disney World, I'd hate it. Fantasy and sci-fi don't have any synergy, if not negative synergy.

  • Report this Comment On September 01, 2009, at 5:55 PM, wolfhounds wrote:

    I don't know what success Disney will have with Marvel. I do know I bought MVL at $14 and sold at $48.5. Disney stock, on the other hand, has been mired for over ten years.

  • Report this Comment On September 01, 2009, at 9:00 PM, NFLNostradamus wrote:

    I'd agree most with Munarriz (Disney tried the Silver Surfer aka Kenny Mayne for as long as they could and can' get Scott Van Pelt to spray paint his dome with some chrome Krylon!) Seriously, the main market point here is the male teen. Bob Iger said it in a CNBC interview, although he prpbably did not say it best....Disney was aggressively going after young boys. Then we were informed that Iger's favorite Disney character is Tinkerbell. Geez. However, this is smart by Disney even if it is too pricey at first sight.

  • Report this Comment On September 01, 2009, at 9:20 PM, Mary953 wrote:

    I know too many ladies in their teens, 20's and 30's who have never lost their love of all things Disney to ever bet against the Mouse. Perhaps the addition of the Marvel galaxy will add more enjoyment for the spouses that they take with them to the theme parks. I also know lots of guys who choose the Marvel movies first over chick flicks. Either way, the money goes to the same coffers.

  • Report this Comment On September 01, 2009, at 9:27 PM, NFLNostradamus wrote:

    Pleasing all ages of genders should translate well across all platforms for Disney, but my kids will be ticked if this somehow spells the end to Phineas & Ferb.

  • Report this Comment On September 01, 2009, at 9:33 PM, Melaschasm wrote:

    Marvel was a great investment. They have tons of stories to be told on the big screen, and likely would have continued to enjoy market crushing returns for years to come.

    Now I am forced to consider Marvel a short term concern. There is a chance the buyout price will increase, in which case I should hold on a little longer. However, if the deal does not go through, then it is likely that Marvel's stock price will plunge for awhile.

    Based upon that analysis, I will be locking in my current profits, and if the deal fails, I will likely be able to buy back into Marvel for less than the current price.

  • Report this Comment On September 01, 2009, at 10:05 PM, mountain8 wrote:

    Marvel would have redoubled todays near $40 within two years by itself. It was just starting to expand and grow. Within two years, Marvel should contribute $0.20 to the price of Disney shares. I don't remember voting for this.

  • Report this Comment On September 02, 2009, at 9:25 AM, catoismymotor wrote:

    Dear God,

    Please keep Miley Cyrus from starring in Iron Man 2.

    Keep up the good work,


  • Report this Comment On September 02, 2009, at 12:21 PM, checkingitout wrote:

    Well, I'm certainly not happy. I own Marvel and I also own Disney through my Pixar stock. I never bought Disney directly. I've enjoyed my profits from both my Pixar and Marvel stocks. However, ever since Disney bough Pixar, the Disney stock went down and the dividends it pays don't begin to make up for the capital gains I'm not going to get with my original Pixar stock purchase. I suspect that Marvel will end up the same way.

  • Report this Comment On September 02, 2009, at 1:30 PM, Global10 wrote:

    I don't see how this is not a good move on Disney's part. I don't think kids at any age really care about seeing the credits of any movie. Yup, sad to see it go but we'll all adjust after a while.

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