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Disney-Fox Deal Approaches the Finish Line -- What Lies Ahead?

By Motley Fool Staff - Aug 6, 2018 at 1:14PM

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The mega-deal recently cleared some significant hurdles and is heading for completion in 2019.

Both shareholders and U.S. regulators have signed off on the deal. The bidding war has come to an end. What should we expect now from the massive combination of Walt Disney (DIS -3.81%) and 21st Century Fox (FOX) (FOXA)?

The Industry Focus is checking back in on the $71 billion deal to discuss what shareholders should look forward to as the deal closes in the coming year.

A full transcript follows the video.

This video was recorded on July 31, 2018.

Vincent Shen: It's been a few months since we last checked in on this ongoing saga. The news from last week helps to put a nice bookend on the deal. We're going to discuss what happened and what investors should expect going forward.

First, back in late May, Dan Kline and I spoke about a potential counteroffer for the Fox assets from Comcast (CMCSA -0.91%), and the inherent uncertainty that accompanies this type of bidding war. It wasn't until mid-June, in the immediate aftermath of the Justice Department announcement that they would clear a different deal, a big one between AT&T and Time Warner, that Comcast stepped up to the plate. They put out an offer for $65 billion in cash. Disney was forced to respond with a $71 billion deal that includes both cash and stock. Earlier this month, ultimately, Comcast chose to withdraw its bid.

This brings us to the past week. Shareholders at both Fox and Disney have approved the deal. The Justice Department has given its approval as well, with one small requirement, and that's that Disney will divest itself of Fox's regional sports networks that compete with ESPN. Beyond that, Disney still gets the valuable film and television properties, a majority ownership of Hulu, stakes in Star India and Sky, which we'll discuss a little bit more later.

Asit, my question for you is, what comes next for Disney and its shareholders, besides the fact that, I'm sure a lot of people at the company are popping champagne. What should they be looking out for in the year ahead?

Asit Sharma: The major thing that shareholders want to look to next is, when will this deal close? Past regulation from the U.S. side, U.S. regulators, have approved the deal, but we're looking for European regulators, Chinese regulators, major markets, to give their blessings on this deal. The soonest timeframe that I can see is an early 2019 approval, which means that shareholders can start expecting to see some impacts of the merger, probably, in the back half of the year.

If you're looking for significant accretion opportunities, that is, putting two companies together, and net revenue and earnings increasing, that might come from this interesting investment that Disney has undertaken in what's called over the top services. This refers to streaming services which bypass traditional channels. As most of our listeners who follow or own Disney know, the company is going to pull much of its content from Netflix in 2019 and offer its own streaming service. This service will focus less on quantity. That's Netflix's model. They'll focus more on quality and its gold-plated shows, which go back decades, movies as well.

I want to talk briefly about what that means in the combination of these two companies. To go back a little bit on what the service will look like, Disney is expecting to have about 7,000 television show titles in fall of 2019. It's also going to have franchises that viewers love, such as the Marvel Universe, Star Wars. Those movies will be available, they'll be pulled from Netflix. All R-rated content is going to live on Hulu. Vince, as you mentioned, both Fox and Disney were joint partners, along with some other media properties, in Hulu. This deal makes Disney the controlling shareholder in Hulu. They'll shove R-rated content over to that, and the Disney family programming that it's known for will live on this streaming service. The company will also have some original content, including five original movies and five TV shows, by the end of 2019.

What we can expect is that once this merger completes, there will be some immediate shifts into the new streaming service. I expect that we'll probably see the National Geographic show, which is a really lucrative Fox property, shipped over pretty quickly. I think Disney CEO Bob Iger has already signaled that. We'll also see great film properties such as X-Men and Avatar also migrate over to the streaming.

The last thing I want to point out about this merger is that both of these companies have a prodigious film studio operation. They're projecting $2 billion in cost savings and synergies by 2021. Part of this will be realized in cost-cutting. Both companies replicate many of their services in film, such as production, distribution, marketing. You'll see an emerging news story over the next few quarters of, unfortunately, layoffs, because so much in the film side of both businesses is duplicative and redundant. That has a good bottom line impact, but unfortunately it comes with people losing their jobs.

All in all, for 2019, look late in the year for an impact. I really think you'll see most of the significant momentum start to happen in early 2020.

Shen: Awesome, thank you! Something I'd like to mention before we move on to our next topic is the framing for this story. Listeners, remember, these multibillion dollar deals, all of this jockeying is as much defensive as it is offensive. Keep in mind that recent estimates indicate that consumers are cutting the cord at an accelerating rate. By 2022, as many as one in five people will have abandoned the pay-TV model in favor of streaming alternatives from companies like Netflix, Amazon, HBO and others. With this jockeying for these Fox assets, Disney is answering this long-term trend with these streaming offerings that you mentioned, Asit. They have all of these projects in the works that cater to sports, kids, or adults, plus Hulu. Ultimately, the Fox franchises, the studios, those assets will really make those services more appealing.

The last thing I'll mention is, don't forget that part of the acquisition is, Disney's taking over Fox's 39% stake in Sky. This is the leading traditional paid-TV business in Europe. Fox has supplied bids for complete ownership of Sky, but that was previously held up by regulatory concerns. Disney is now in the driver's seat, and the company is still likely to pursue that outstanding 61%, with Fox's latest bid at over $15 billion for that outstanding stake.

If you turn to the other camp, all these negotiations and this bidding, there are still Comcast shareholders, as well. On one hand, they lost the opportunity to increase their scale with the Fox assets. That means they have even larger, more influential competitor in Disney. On the other hand, Comcast leadership has shifted its dry M&A powder to taking over Sky entirely to branch out of the North American market. Sky has over 23 million customers that can be added to its ranks, and Comcast is offering over $43 billion for that European business in its entirety. It's the better offer at this point in time, and they're still going through that process.

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Twenty-First Century Fox, Inc.
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