When news broke that Twenty-First Century Fox (NASDAQ:FOXA) (NASDAQ:FOX) was in discussions with Disney (NYSE:DIS) to part with its valuable movie and TV properties, along with certain cable channels and overseas businesses, the entire entertainment industry jumped to attention.
On this episode of Industry Focus: Consumer Goods, Vincent Shen is joined by Motley Fool contributor Daniel Kline to break down why Walt Disney, Sony, and Comcast (NASDAQ:CMCSA) would be interested in paying top dollar for these assets. They also look at how each company would integrate the properties and who would benefit the most from a deal.
A full transcript follows the video.
This video was recorded on Nov. 21, 2017.
Vincent Shen: Our next topic is actually pretty similar in that it revolves around the potential acquisition of media assets. In this case, it's from 21st Century Fox. There have already been several weeks of talks or interest reported from companies like Walt Disney, Comcast, Verizon and Sony. Dan, can you tell us more about what parts of the business Fox might be looking to part with, and what the various suitors seem most interested in acquiring?
Dan Kline: Fox owns a number of things. The key things that are being talked about here are their movie studio, their television production arm, and between those two, they own all sorts of rights -- movie franchises, The Simpsons, all the Fox animation. So that's a real plum for any of these services, because the reality is, big-name content has done very well. You can look right now at the box office and see Justice League and Thor and all these franchises doing well. The other pieces of it are the Fox entertainment channels -- FX, FXX. The last piece is the foreign cable arm -- 39% of Sky in Europe, I'm not sure how much they own of the India TV Group, and a bunch of other related assets. So this is really a case of Fox separating out its cable news and sports business and its broadcast network. And those businesses don't necessarily profit all that much from owning all this content and distribution. Obviously, there's a little bit of a bleed through with the television. But in theory, they can lock in rights deals and still be able to have the benefit of that while Disney or Sony or Comcast could add all of these franchises, which they probably have a better avenue to exploit, specifically Disney and Comcast, than Fox does right now.
Shen: We'll first focus on Disney, because they were reported as being the initial party to approach Fox regarding these deal discussions. There's a lot to like in terms of what Disney can get out of this deal. As you mentioned, the film and television studios, plus some of those cable networks, that will definitely bolster Disney's own media networks and their own studio businesses.
Kline: And it's important, Disney is already sort of tied in with Fox. Fox owns Avatar, which Disney has a land at Animal Kingdom. Disney also has other presence with the X-Men, which is Marvel, so that's also a property that could come home, which would allow them to expand their own cinematic universe. This ties in incredibly well with Disney's plan to launch a Netflix rival. This would give it access to everything from Goosebumps, which would be a lovely series for this, to franchises like Die Hard and Ice Age. Or imagine what Disney could do with rebooting Home Alone. There's a lot of content here that Fox can't necessarily get off the ground that Disney could really do something with, especially as it's spending billions of dollars trying to compete with Netflix.
Shen: The sports-focused streaming service that's expected from Disney should be coming out early next year. The Disney-branded, more family entertainment service, is expected to come in 2019, after the current agreement that Disney has with Netflix expires. But there's also Hulu. These two companies, Walt Disney and Fox, have stakes in Hulu. If Disney was to take over that, it could have a majority interest in Hulu, and that could easily become a streaming service for the company that's more focused on mature content, dramas, and it could complement that sports service that we mentioned, the Disney-branded one coming in 2019, plus all the other shows and properties like X-Men, for example, you mentioned, they could roll into it.
Kline: Absolutely. Hulu is also rolling out its live TV streaming, which for Disney, which is losing homes with ESPN, ABC and all its cable networks, controlling Hulu and being able to make its own channel as a key part of that live streaming package would also be another plum.
Shen: Yeah. The last thing I want to speak to is some of the international assets. There's a 39% stake in Sky that Fox currently holds. Sky is currently based in the U.K. It's the largest pay-TV player in Europe. Fox actually has a $15 billion bid right now to acquire the remaining stake of Sky. I believe, right now, that's in a bit of a regulatory mire. The prospects of that coming out with an approval are basically going down by the day.
Kline: And some of that is due to Fox itself. So there might be a better chance of Disney making that deal if they want to.
Shen: And some of the history between those entities, absolutely. Then, there's also control of Star India, for example. This is media company in India that would be another asset I think would really help Disney expand its international reach. Those are two properties that I think Comcast would also very much be interested in in terms of expanding some of its international business.
Kline: You could argue that Comcast and Sony need this more than Disney does. Comcast is No. 2 in the franchise space, but while Disney has a very stable business, where the vast majority of the movies that it puts out every year are essentially guaranteed hits, sequels to things that have done well, expanded universe type things -- Comcast has an every other year structure. It doesn't own enough. It has Fast and the Furious, it has the Lost World, but it doesn't have enough of those properties. And if it takes over this, you could argue its slate would then equal Disney. And just like Disney, it has the theme parks and the television and the ability to exploit that. It would also probably have the critical mass it needs to either walk into a Netflix and make a very strong deal, or launch its own service, which at some point, the market will become too crowded. Sony, you can make the same argument. They're probably the most in need. They have the least stable system of franchises and models, but they don't have as many avenues to monetize and exploit them. But of course, there's all sorts of partnerships out there. I think, if Disney wants this, they're going to pay very dearly for it, because the competition is going to be incredibly strong.
Shen: I do want to focus in on 21st Century Fox's business, give listeners an idea of the revenue breakdown. For the cable network's business, about $16 billion, or 56% of their top line. Film studios coming in at $8 billion, or about 30% of the top line. Then, their broadcast TV, which would not be included in the asset sales that are being discussed here, about $5.6 billion in the most recent fiscal year. The company currently has a market cap of $55 billion. So even a partial buyout would be a huge deal in the media and entertainment industry. I think the acquiring company is ultimately going to face some regulatory issues here similar to what we talked about in the last segment on AT&T and Time Warner, in that any way you cut it, whoever the acquiring company ends up being, there are assets and properties that will compete directly with either the content-focused rivals like Disney, or on the distribution side with Comcast. So there's some of that to consider, as well.
Kline: I think the reality is, any of the three potential suitors would be willing to sell off FX if it meant they could have access. This is really an intellectual property deal. Everything else is icing on the cake, it's gravy, it's wonderful. But if you are Disney or Comcast, you're looking at your theme parks, you're looking at your movie studio, your ability to fill in these streaming services, and that's what they would be buying. All of these other things -- if Disney bought this, yes, they want distribution in Europe. They have, obviously, animated films and other things that travel the globe. Marvel characters are globally dominant. But if they had to sell the stake in Sky to make this happen, I don't think that's an impediment. I think this would be a relatively easy negotiation, in terms of, "There are some regulatory concerns here."
Shen: Yeah. The only thing I would say now with negotiation is, there's no deal on the table yet, no official price tag that I've been able to find anywhere. But if Fox ultimately comes to an agreement with one of its suitors, definitely get a better price with the various companies now circling and expressing interest in the assets. The early talks with Disney stalled, because they couldn't agree on terms. And with a potential bidding war among interested parties, I think Fox will definitely come out with a more favorable deal than it would have otherwise.
My last point, if we can step back a little bit and take a 10,000 foot few of not only this Fox news but the AT&T-Time Warner deal, I think consolidation among the content creators and distributors in this industry is likely to continue as they try and diversify their businesses and get a little bit more leverage to compete and build these big portfolio-style companies. Netflix ultimately has thrown the industry through a loop. They started with DVD mailers, now they've evolved into a streaming service and a powerhouse with dozens of original movies and TV series. So companies like Disney and Comcast are grappling with cord-cutting, they're seeing weaker growth and hits to their bottom line with customers changing how they consume entertainment. I think this model of combining distribution with the creation, in terms of the content, I think it's only going to become more prevalent barring some type of regulatory interference.
Kline: Yeah. It's really about a massive change in distribution. If you're Disney, you are very worried about cord-cutting, but you're also worried about the fact that it's harder to get people to come out to movie theaters. Yes, people still go for Thor, they'll still go for Star Wars, but that mid-tier movie has become a lot harder. So if you're Disney, if you're Comcast, and you can own all these great franchises and use them to create a platform, well, if movie theaters die, would I pay $19.99 a month instead of $9.99, but I get two new Marvel movies every six months and a Star Wars and a Disney animated film and all those other things? This is about getting directly to consumers, because consumers are pretty rapidly cutting out the middleman.
Daniel B. Kline has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix, Verizon Communications, and Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.