Disney (NYSE:DIS) has been working through the regulatory approval process for its pending acquisition of Twenty-First Century Fox (NASDAQ: FOXA)(NASDAQ: FOX). The deal was given the green light in the U.S. over the summer of 2018, on the condition that Disney sell off Fox's regional sports networks that compete with Disney's ESPN.
The last major hurdle was getting the same regulatory approval in Europe, and now that hurdle has been cleared -- again with minor concessions. This is a big victory for shareholders and Disney's plans to expand its entertainment empire.
What the European Commission said
Fox's broadcast channels, Fox News, Fox Business Network, and Fox's national sports networks are not included in the Disney deal. The European Commission approved the merger of the rest of Fox into Disney with one condition: Disney must divest itself of certain "factual channels" in Europe that produce things like documentaries and science-based programs.
What that means for Disney is that it will have to sell its interest in the History, H2, Crime & Investigation, Blaze, and Lifetime channels in the EU. Those channels are controlled by A+E Television Networks, which is a joint venture between Disney and privately-held Hearst Corporation.
No sweat. Now what?
Divesting a 50% stake in a handful of nonfiction TV channels is a more than acceptable condition to acquire Fox. The assets Disney is really after are of the film variety -- blockbusters that range from box office ticket record-holder Avatar to the X-Men franchise (which will get reunited with the rest of the Marvel superhero assets, at the very least in business form).
Merging two of the six major film studios will make Disney an even more formidable force to be reckoned with. It will bolster Disney's next-gen TV services, too. That includes the new ESPN+ service, as well as Hulu -- of which Disney will own a 60% controlling stake, post tie-up. Disney will also use its own assets (including what Fox brings to the table) to launch the family-friendly Disney+ streaming service in the second half of 2019, and will reinforce Hulu with more adult content to catch up to Netflix (NASDAQ:NFLX) in the streaming space.
And that's why offloading its stake in the A+E joint venture won't be that big of a deal. In fact, it could be good news if Disney can cash out of those TV assets and reinvest the proceeds in higher-growth initiatives, like new content for its streaming services. Netflix has had great success filling up its own library with original shows and movies. A combined Disney and Fox should be able to replicate that by tapping a massive back catalog, not to mention new projects that may be in the works.
Disney already expects to receive some "cash back" from its looming Fox takeover, like the aforementioned sale of Fox's regional sports networks. Furthermore, Fox lost its bid for British cable operator Sky to Comcast and agreed to sell its existing 39% stake in the company for $15 billion. Disney said it will use that cash to pay down debt from its $71 billion takeover of Fox so that it will have more flexibility to invest in developing new content.
Will relinquishing its interest in A+E in Europe be another Sky situation for Disney? It could be, although the windfall will be far smaller. Nevertheless, the European Commission's ruling ensures that Disney's land grab will remain focused on Fox's most important assets: old and new content with which Disney can try to control the global box office and internet-based TV.