Shares of Disney (NYSE:DIS) inched higher on Monday, fueled by reports that Verizon (NYSE:VZ) was considering a buyout of the media giant. A New York Post column over the weekend discussed the rumor, with a "well-placed banker" saying not to count Verizon out.
This isn't the first time that a tech or telco giant has been linked to the pursuit of Mickey Mouse, and it probably won't be the last. Verizon would have plenty to gain by adding Disney to its content arsenal, but let's not jump to conclusions. Verizon isn't going to buy Disney. Let's spell out the reasons why the nuptials just aren't going to happen.
1. Verizon may not be able to afford Disney
Disney isn't up for sale, and it doesn't have to be. Despite the challenges at ESPN and its other cable properties, most of the media mogul's other businesses are holding up just fine. It would take a hefty premium to convince Disney and its shareholders to give up, and this is where one has to wonder how Verizon lines up financing.
Disney's enterprise value presently clocks in at $187.6 billion, and that's before tacking on a reasonable premium. Verizon's more valuable at $296.3 billion, but it's also saddled with $116.8 billion in debt. How is it going to pay for Disney? Stock as legal tender isn't an option. Verizon shares hit a fresh 52-week low last week. Disney investors will want cash -- a lot of it -- and that's money that Verizon won't be able to raise.
2. The synergy isn't all that obvious
It's easy to see how Verizon would capitalize on Disney's assets. It can canvas its theme parks with Verizon Wi-Fi. It can make some ESPN programming and other Disney-owned content available exclusively to Verizon wireless customers. Disney Stores can double as Verizon retail centers.
It all sounds great on paper. It will be a disaster in application. Hammering home its Verizon offerings at Disney's theme parks will be lost on its sizable base of international tourists. Splintering its content will give cord-cutters even more reason to kiss their cable companies goodbye. Please don't tell me you took my suggestion of Disney stores selling Verizon plans and replacing shattered screens seriously.
Verizon would be paying a lot for Disney, and the sum of the parts may be worth less than Disney and Verizon on their own.
3. Yield signs
Verizon's in a funk. Revenue has declined for four consecutive quarters. Profits are falling even harder. One thing that's been keeping Verizon at current levels -- even if they're the lowest levels since early 2016 -- is its chunky dividend.
Verizon is currently yielding 5.1%, rewarding income investors for their patience at a time when the market for wireless customers has become a cutthroat business. How likely is that to stick if Verizon buys Disney? Verizon will have to take on a lot of debt to finance a Disney purchase, giving it less wiggle room to return money to its shareholders. Buying Disney would likely mean a dividend cut, and that's not going to go over too well with Verizon's shareholders.
Verizon can't buy Disney. Verizon shouldn't buy Disney. Let it go.