Disney Conquers the Stars

Consider it a marriage at the highest levels of Hollywood royalty. Walt Disney (NYSE: DIS  ) , holder of some of the most recognizable pieces of intellectual property on the planet, is to buy Lucasfilm, creator and owner of the Star Wars franchise. The firm will shell out $4.05 billion in cash and stock to buy the studio from its namesake creator and sole shareholder, all-star producer/director George Lucas. That sounds like a lot of money, but for what The Mouse is getting... whoa, boy.

An Empire-sized buyout
It's an epic blockbuster, this deal. After it's closed, Disney will hold all future rights to Star Wars, perhaps the most valuable chunk of intellectual property in history, and the reason it chased after Lucasfilm in the first place. The franchise is expected to take in around $215 million annually in licensing revenue, according to Disney. Meaning that, in the worst case, the Mouse will recoup its costs after two decades or so.

The worst case isn't going to happen. Far from it, most likely. The next Star Wars movie is in the early stages of development and is slated to hit theaters in 2015 (it'll be Episode 7 in the series, in case it's slipped your mind since the 2005 release of Episode 3, Revenge of the Sith). The upcoming installment is sure to be a hit -- how can a Star Wars film be anything but? Better, Disney plans to make Episodes 8 and 9 at the rate of one every two to three years.

It's risking audience fatigue, of course, but then again there have been six of these things and they've all been hugely popular. So at the moment, that gamble is far safer than it would be for any other movie franchise Hollywood's ever cranked out.

And of course there's the merchandising, which in the wake of a new release will bring in a wave of money. One of Disney's big talents, of course, is leveraging its intellectual property into busy cash registers at toy stores and other retailers. The company is bound to be much sharper and cleverer making money from Lucas' baby than, say Pearson (NYSE: PSO  ) unit Dorling-Kindersley. This is the book publisher that lost its shirt with a scattershot range of Star Wars-related titles it issued after the first series prequel (The Phantom Menace) came out in 1999.

Lucas' brainchild will provide a nice jolt to consumer products, the unit that sells Disney-branded merchandise. The division brought in a little over $3 billion in 2011, meaning that the $215 million Star Wars brings to the table would give it a lift of around 7% on an annual basis. But that's in a year when there's no movie to hook branded merchandise to; imagine the swollen demand for Star Wars toys and gadgets once there's a film in theaters.

Luke, I'm your...
Disney doesn't exactly get the whole kit 'n' caboodle in buying Lucasfilm. News Corp. (Nasdaq: NWS  ) unit Twentieth-Century Fox, the entity that distributed all six, still gets a piece of the action in any re-release of those films or home video sale. And the distribution rights to the existing titles of George's other big-ticket creation, everyone's favorite hero archaeologist Indiana Jones, are held by Disney rival Paramount, a division of Viacom (Nasdaq: VIA  ) .

But worrying about either is like buying a Rolls-Royce and complaining that the radio only has 25 preset stations. Star Wars alone is a strong enough piece of intellectual property to produce the kind of returns that will make its buyer more than happy. Plus, the resources Disney will pour into marketing a new Star Wars or Indiana movie will only help Fox and Paramount in regard to the first six movies; those companies and their shareholders will reap the benefits of higher sales without having to do much extra work.

Another plus for Disney is that Luke Skywalker's real father is included as part of the deal. Lucas will hang on as a consultant to provide guidance and creativity for the franchise going forward. The company knows better than to disturb a huge cash cow, and it's more than likely it'll keep a light hand on Lucas as he conceives and creates the new movies (and whatever else flows from them, like potential TV series, books, amusement park rides, etc.).

Lucas will probably have at least some input into the merchandising, too, which is also a positive given his experience and success in that area.

The entertainment business is full of hot air and empty glorification. In this instance, though,the reality more than lives up to the hype. This is a huge deal, and Disney is to be commended for engineering it. The expense is more than worth the riches it'll almost certainly gain with the most precious intellectual property in the universe.

Disney is obviously one of the dominant players in the entertainment area. If you'd like to learn about other stocks poised to make it big in coming years, our free report "3 American Companies Set to Dominate the World" has all the details. Click here to get your free copy before it’s gone.

Eric Volkman has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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