What many industry watchers have been predicting has happened: Entertainment powerhouse Disney (NYSE:DIS) increased its offer to $71.3 billion to acquire the media assets of Twenty-First Century Fox (NASDAQ:FOX) (NASDAQ:FOXA). The amount is significantly higher than Disney's initial bid of $52.4 billion, while topping an all-cash offer by Comcast (NASDAQ:CMCSA) for about $65 billion.
Disney made its latest bid just as Fox's board was about to meet to discuss the Comcast offer, which Fox has now tabled, calling Disney's bid "superior." Many suspect this won't be the last chapter in the story, expecting Comcast to come back with an even higher offer.
This raises the question for Disney shareholders: Why is the company so insistent on acquiring these Fox assets, and how would the company recoup its massive investment? Some think Disney should just walk away from the deal. Here are four reasons Disney raised its offer for Fox.
Streaming will only get bigger
In an entertainment landscape increasingly dominated by streaming services, Disney CEO Bob Iger said Disney would be able to expand its "direct-to-consumer offerings" and strengthen the company's "digital future" with the deal. Upon the close of the deal, Disney would own considerably more movie and television assets, something the company would immediately put to good use.
Disney would use its new treasure trove of content to populate both Hulu and the new Disney-branded service that is scheduled to launch next year. Disney currently owns a 30% stake in Hulu, which would increase to 60% if the Fox acquisition closes. Disney's ESPN recently launched its own streaming service, which is envisioned as a companion to the flagship sports network on cable. The merger with Fox would bring 22 regional sports networks, which would add fodder for both ESPN's cable outlet and its direct-to-consumer streaming service.
The variety in these over-the-top offerings would allow Disney to better compete with companies like Netflix, which currently dominates the streaming landscape.
A hero's welcome
Disney would gain another significant benefit, namely a number of superheroes currently controlled by Fox, which would return to the Marvel stable. Fox has had varying degrees of filmmaking success with these characters, from box office smashes like Deadpool and Logan, to cinematic failures like The Fantastic Four, Daredevil, and Elektra. A deal with Sony Pictures illustrates the power of Disney, bringing temporary control of Spider-Man home to the Marvel Cinematic Universe and to rave reviews and $880 million in worldwide box office.
Considering the success Disney has had leveraging the value of its entertainment assets, this could be a win all around. Marvel Studios, under Disney's tutelage, has generated nearly $17 billion in ticket sales over the past decade, producing an average of $888 million in worldwide box office per movie. The Star Wars franchise has also prospered, generating nearly $5 billion in ticket sales across just four films.
Clearing regulatory hurdles
Disney and Fox have been working to gain the necessary regulatory approvals worldwide for the past six months and have invested considerable time and effort into the process. Comcast's recent bid was only formally launched after AT&T won approval to acquire Time Warner, sparking belief that changes in the regulatory environment may have shifted in Comcast's favor.
It's important to note the judge who presided over the AT&T merger, Richard Leon, specifically noted in his decision that the case shouldn't signal such a change (emphasis added): "The temptation by some to view this decision as being something more than a resolution of this specific case should be resisted by one and all!"
On the conference call to discuss the increased bid, Iger said, "We are already six months into the regulatory process and we are confident we have a clear and timely path to approval." Even more importantly, Disney may be closing in on an antitrust approval from the U.S. Justice Department, with a decision coming in as soon as two weeks, according to a report in Bloomberg.
Increased international exposure
On the conference call, Iger specifically called out the international benefits of the combined "global entertainment company," seeing particular opportunities in "Europe, India, and Latin America." He was no doubt referring to two specific assets in the mix: Sky, which has been called the "crown jewel" of European cable television, and Star India, which boasts 700 million customers. Sky would bring 23 million subscribers via its cable and over-the-top services. Star India has 61 channels, as well as two dedicated streaming services under the banner Hotstar, which hosts another 150 million subscribers. Star's combination of cable and streaming reaches 90% of Indian households.
This expanding international presence would support Disney's current cable businesses, as well as add additional fuel to its streaming aspirations.
It's still a good deal -- even at a higher price
With Disney's history of cross-promoting assets throughout its various business channels, and its track record -- as Iger put it -- of "integrating creative cultures," like those of Pixar, Marvel, and Lucasfilm, the company has shown its mastery of assimilating other characters and content and creating something greater than the sum of its parts.
I don't think the Fox deal will turn out any differently.