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3 Fools, 1 Deep Dive Into the Disney/Fox Deal

By Mac Greer - Dec 16, 2017 at 1:30AM

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Even for a media company as acquisitive as Disney, the assets it's picking up in this $52.4 billion purchase are major.

In this Market Foolery podcast, host Mac Greer, Total Income's Ron Gross, and Million Dollar Portfolio's Jason Moser dig into the details of 21st Century Fox's (FOXA) (FOX) massive asset sale to Disney (DIS 2.33%). The House of Mouse is picking up a ton of solid properties that it can leverage, from the X-Men to The Simpsons -- particularly in the streaming services it's developing.

Then there are the movie studios, domestic and local cable networks, a smorgasbord of titles, and a controlling stake in Hulu. There's a lot in this package, and the guys, all of them Disney shareholders, sound optimistic. They consider Disney's pivot toward a more direct-to-consumer model, its long-term plans, and what they consider some of the best news of all -- how long CEO Bob Iger will stay around to steer his expanded company forward.

A full transcript follows the video.

This video was recorded on Dec. 14, 2017.

Mac Greer: It's Thursday, Dec. 14. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio, we have Ron Gross from Motley Fool Total Income, and Jason Moser from Million Dollar Portfolio. Guys, welcome!

Ron Gross: Hey, Mac!

Jason Moser: Hey!

Mac Greer: Guys, it's an exciting day. We have a big deal. Of course, I'm talking Disney. Ready to talk some Disney?

Moser: We were hoping for this last night. We were like, "Please announce this. It'll be so much fun to cover."

Greer: Well, it came through. On today's show, all Disney, all the time. Disney is buying most of 21st Century Fox Entertainment's assets for $52.4 billion in stock. Jason, that sounds like a lot. Those assets include Fox's movie studios, U.S. cable networks like National Geographic and FX, international networks like Star TV and Sky, and a controlling stake in Hulu. Disney also gets brands like the X-Men, Avatar, and The Simpsons. I think it's worth $52.4 billion just for The Simpsons.

Moser: I mean, you tack Family Guy on there for free now.

Gross: I heard that Marge is the new Disney princess. I heard somebody talk about that.

Moser: What about Lois? 

Greer: So, Jason, what about the deal? We're all shareholders, I should add. We're all Disney shareholders, so we all have some skin in the game here. Do you like the deal?

Moser: On the whole, yes, I do.

Greer: Uh-oh, hesitation!

Moser: No, no hesitation. There's always reason to look at both sides of the coin. But I think, when we look this thing in total, yes, I think it's a good deal. Generally speaking, I want to look at leadership's language and understand exactly what they're trying to do with all of this. So, going to the transcript this morning for the call, everything Bob Iger is doing for this company at this point centers around building a long-lasting direct to consumer relationship. That's not something they really built this business on to this point. But given where technology and the internet are taking us, it's really about direct-to-consumer at this point. That's his North Star and why this deal is happening. This deal is going to facilitate him getting things into that direction.

Gross: I would say, for the last year, I've been fatiguing a little bit on the Disney investment. I've owned the stock, my daughter has, for 15 years, and it's been a great investment. But we've seen ESPN go downhill from a profitability perspective, and then we saw them announce that they were going to do a sports streaming service, and I was kind of getting a little bit iffy here. And you know what? Now I'm back, baby! I like this. I think Netflix (NFLX 2.96%) should get a little bit nervous. I think the content is there, the technology is there, the management team is there. This is a fair price to pay for these assets, and I think the future for Disney looks bright.

Moser: Resident skeptic on board. You have to love it.

Greer: Let's talk a bit more about the streaming piece of this. This morning, Bob Iger did say that Disney will sell three different types of streaming services: a family-friendly movie and TV subscription, a sports streaming platform, and a more adult-focused Hulu service. So, what do you think of that plan, Jason?

Moser: I like it. Look at Hulu, for example. This is going to give Disney a controlling interest in Hulu, which I think is very important, especially when you look at how Hulu is building out their live TV offering. Essentially, we've been talking in the last five years about the unbundling of the media space. Everything is being unbundled. It's going to just  a la carte apps. And at some point or another, the concern was, we're going to reach a point in time where, in order for you to get everything you want to watch, you're going to have to pay for a lot of different apps. And eventually, that cost is going to come to parity with what you were paying for that bundle back in the day.

I think the big advantage that we have today versus back then, when we were still relying on the cable providers, is the customer-service aspect of over-the-top offerings is superior in virtually every way. And you're not beholden to a cable box, which I think is just one of the worst things you can ever do, is get one of those cable boxes in your house, because then you're just stuck. Rather get a smart TV or Amazon Fire TV or an Apple TV or something, and you can go whichever direction you want. But instead of unbundling, it's trying to figure out how to make that bundle better. Instead of unbundling, let's make the bundle better. And how do you do that? You give people the channels that they want to watch, and you give it to them at a compelling price.

So we're talking about Iger wanting to create that direct-to-consumer relationship. He's doing that in three ways. He's creating exceptional and creative content, growing their global presence, and continuing to innovate on the technology side. And this deal really does help fire in on all three of those points there, because as we know, Disney also has the controlling stake in BAMTech, which is the infrastructure for a lot of that sports streaming that's going on today.

Greer: I think it'll be important to see what happens with Comcast's (CMCSA 0.84%) 30% stake in Hulu. There's some restrictions that expire in September 2018 that ties the hands of anybody that wants to make any structural changes to Hulu. Once that expires, and the fact that Disney has the majority ownership there, and could even increase that if they could somehow get a hold of Comcast's stake, then they could really go ahead and start to, as you said, make changes to it, maybe change the target audience, make it more adult-themed. It sounds weird when we say "adult-themed." 

Greer: Yeah, it does.

Gross: I hope everyone knows what we mean when we say "adult-themed."

Greer: This is a family-friendly show.

Gross: But it'll be interesting to see what happens with Comcast. It'll actually be interesting to see what Comcast has to say about any of this. This is not necessarily a done deal. There's going to be a lot of scrutiny here from the Department of Justice from an antitrust perspective. It's going to be interesting to see if there are any competing bids. I tend to think this will get through, but it might get through with some changes that the Department of Justice requires. That'll be interesting to see.

I think we should focus here on the sports segment a little bit more. I saw one quote that I really found intriguing that said this isn't an entertainment deal; it's a sports deal. And that's very interesting. As we know, ESPN has really been the profit center of Disney for quite some time. But over the last year or so, that has waned. As part of this deal, Disney will acquire all of the Fox Sports regional networks. That's increased content in MBA, Major League Baseball, hockey, the Big Ten Network, that increases ESPN's potential offerings there for content they can offer. I think it bolsters that business.

Greer: Not to mention the international piece, right, Jason?

Moser: Yeah, there's going to be plenty of international presence they gain from this one. That Sky deal is actually cut between 21st Century, and I think that's going to be something that's sealed right before this acquisition ends up closing. But that's going to be 23 million households, in European markets primarily, that they don't have today. And you look at Star India, and that's going to be around 700 [million]-720 million viewers that they currently don't have today. So there's a lot of opportunity to get content out to a whole world that really hasn't had exposure to what you had to offer to this point. So I think it's going to be interesting to see how they attack this presentation, the distribution of this.

With ESPN, there's no question that ESPN has been facing challenges. ESPN is a model that, for a long time, was really the owner of its market. And as that goes on over the course of 20 years, you get this bloated cost structure and everybody's feeling really happy about things until there's signs that maybe your business is undergoing some disruption there. I think it's one thing to look at ESPN in Disney's sports side of the business and say, oh, it's in trouble, it's dead. It's another thing entirely to say, this is a business that's had a lot of success to this point. It's undergoing some challenges; it's undergoing some disruptive forces. They still have the opportunity to change with the times and make it better.

I do think, to Ron's point about getting those regional sports networks, in the near term, it's very easy to be critical and say that's going to be really difficult content for them to distribute in any meaningful fashion. And yes, it may well be. But let's not think about today. Let's think about 10 years from now, when all of these deals start expiring and these leagues just have to start cutting new deals to distribute all that content. Well, the property that owns most of these networks, whether they're regional or national, is going to have a little bit of a hand up there in being able to dictate those new negotiations.

And let's not forget, too, that sport viewing in general is undergoing some challenges itself. When we look at the younger generation coming in, from 2000 to 2015, the median age of these viewers got older. So these leagues are going to have to figure out new ways to distribute this content in a more enjoyable and digestible fashion. So this is a step in that direction.

Now, what Disney really needs to do is nail it on the mobile side, because that's something that they haven't yet fully addressed. We're going to need to see a little bit about that before I can be convinced that they have this figured out.

Greer: I want to talk winners and losers here in a minute. I want to circle back to Netflix, as Ron, you mentioned them earlier. Guys, as we wrap up our Disney discussion, let's circle back to the competitive landscape and what this might mean for Netflix. Ron, you said you'd be worried about Netflix earlier. But not everyone is a big fan of this Disney deal. I want to give you a quote from a Wall Street analyst. You used to work on Wall Street; is that true?

Gross: Yes. Don't hold it against me. [laughs] 

Greer: OK, I want to get your reaction to this quote. This was an analyst from Wall Street from Cowen. He's not a big fan of the Disney-Fox deal. And here's what he had to say. He said: "In our view, Disney is committing significant capital to the lost cause of protecting video aggregation margins. Taking on competitors who don't need to turn a profit is rarely a good idea." So, what do you think?

Gross: I think everybody eventually needs to turn a profit, unless you're part of a huge company where you can have a loss leader in one division because the other divisions are making up for that. I don't see Netflix as being in that category. Netflix basically does one thing, and eventually it needs to turn a profit, or otherwise it won't continue to do that one thing.

Greer: So, Amazon and Google, maybe a bit more protected. They're not worried about this deal?

Gross: I think everybody should be a bit worried, because this is now a powerhouse company with a lot of talent behind it, including both technology, management, and content. If you ignore that, it could be at your own peril. I don't think anybody has to lose any immediate sleep, but it's something for sure that changes the competitive landscape.

Greer: Jason?

Moser: I think only time is going to tell. We're going to look back five years from now and we're either going to say that this deal was a little bit of a stumble or this deal was a really good one that Disney and consumers have benefited from. 

I think there on the surface, it's easy to say that Netflix is a loser here because Disney is taking away all that content and then Netflix isn't going to have that content, and they're going to have to pay more for more content. I think the taking on of competitors that don't need to turn a profit is probably a little bit myopic because, like Ron said, Netflix is really kind of a one-trick pony. I don't mean that to be an insult. That's what they do; they stream video and produce content. Whereas Disney, they do a lot of things. They're going to be able to take on the movie division alone here.

And think about that from the perspective of, every year, we look at Disney's movies, and you know that's sort of a lumpy revenue stream. It's very hit-driven, and some years there may not be hits that outpace other hits that were from a year ago or whatever. But now that you bring on this 21st Century movie division, you have the opportunity to really have hits all throughout the year, and not only help grow that division of the business in a meaningful fashion, but also smooth out the results.

But it doesn't stop there, because they're really good at turning all of that IP into consumer products, into things that you find and use in the parks. So Disney is more than just streaming videos. There's no question they're doing this to be more competitive in this over the top market. But I don't think this is a shot fired directly over the bow of Netflix, either.

Greer: As we wrap up here, another part of the story, Disney CEO Bob Iger staying at the company now through 2021.

Moser: Wow!

Greer: The guy's had a pretty nice track record when it comes to acquisitions. Pixar, Marvel, Lucasfilm.

Moser: Maybe this is the grand slam.

Greer: Maybe. Here's the question. As an investor, are we more excited about the Fox deal, or are we more excited about the fact that Iger is staying until 2021?

Gross: They go hand in hand. This is going to be such an integration behemoth-slash-nightmare that you needed him to stay. Otherwise I would be much more concerned, because this is going to be a tough one to get right. I know we hate the word "synergies," but to wring the synergies out, to integrate everything properly. I think, thank goodness for Disney shareholders that he's staying.

Moser: They are calling for $2 billion in synergies. That's going to be something by 2020. There are going to be cost savings here that come into play. But when you look at the mechanics of the deal, all stock, they're going to issue 515 million shares because of this. They have a balance sheet that's going to take care of the business regardless of the debt that they take on. I think it's interesting that they're going to buy back $10 billion in shares leading up to the deal, and up to $10 billion more after the deal. That'll bring the share count down in a fairly meaningful way, I think somewhere in the neighborhood of 190 million shares or something.

But the breakup fee language, I thought that was pretty fascinating, because it ranges anywhere from $1.5 billion to either party based on the reason why the deal doesn't consummate. But if for some reason the antitrust comes in here and gives them the Heisman, tells them they can't do it, Disney is going to be on the hook for $2.5 billion. So Iger is pretty darn confident that this is going to go through.

And like Ron, I would be very concerned if Iger wasn't there with this deal happening. To me, he is a non-negotiable. He has to be there. And if I'm a shareholder in Disney, and I'm not, but my kids are, I think they have to feel really good about the fact that succession has been postponed for a little while.

Gross: And speaking of shareholders at Disney, the Murdoch family will now be 5% shareholders in Disney. Interesting to see what role they play, certainly in the integration. Rupert Murdoch will be important. But how about down the road in 2022? Do we see James Murdoch at the helm once it's time for Iger to retire? I've seen that name thrown around. I don't know the answer, but it'll be interesting to watch.

Greer: Speaking of the Murdoch family, we haven't even talked about what will now remain of 21st Century Fox. Anything there as an investor that interests you?

Moser: Fox News? You probably have, what, half the country that would be pro the investment and half the country that would be against it.

Gross: Fox Sports 1 and 2 are still a valuable platform. Fox broadcasting is still valuable. Do what you will with Fox News. As you said, pros and cons.

Moser: I mean, news properties are valuable, but in the context of today's media space, you have to look at companies, I think, potential winners, beyond just Disney or whomever. You have Twitter and Facebook and Instagram and Snapchat, all of these newfangled media companies of the 21st century. They're going to find their place in this space as well. I think all of those names are potential winners, not only on the Disney and the sports side, but also when you talk about what's left with Fox News and Fox Sports.

Greer: As we wrap up -- as I say that one more time -- over the next five years, does Disney beat the market? It's been a bit of a laggard over the last couple of years.

Gross: I'm going to say that I don't have high expectations for the market over the next five years. I think you'll make some money, but it won't be the returns we've seen recently. So beating that market may not be as hard as one would think. Therefore, I'm going to say that Disney does beat.

Moser: Yeah, I tend to think the same thing. I think we're probably going to run into some challenges in the next few years. And I think in a challenged market, this is a company that you really want to own. It's as blue-chip as they come. I think it's one where you have to commit to owning it almost indefinitely. It's never been a bad one to hold for long periods of time.

Greer: We'll leave it there. Guys, thanks for joining me. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening. We'll see you tomorrow.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Moser owns shares of Apple, Twitter, and Walt Disney. Mac Greer owns shares of Amazon, Apple, Facebook, Netflix, and Walt Disney. Ron Gross owns shares of Amazon, Apple, Facebook, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Apple, Facebook, Netflix, Twitter, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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Twenty-First Century Fox, Inc.
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Comcast Corporation
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