It's finally official. Disney (NYSE:DIS) and Pixar (NASDAQ:PIXR) have agreed to an all-stock merger that will give Pixar shareholders 2.3 shares of Disney for each share they presently own in Pixar. It's a deal valued at slightly more than $7.5 billion, based on Tuesday's closing price -- or $6.5 billion once you account for Disney inheriting the $1 billion in cash on Pixar's balance sheet.
Pixar shareholders have to approve the deal, though that's all but a formality at this point. Pixar Chairman and CEO Steve Jobs has agreed to vote 40% of the company's outstanding shares in favor of the deal. All it would take is a sixth of the remaining shares to nod in approval and it's a done deal, barring any regulatory setbacks. That's unlikely, given Disney's waning popularity in theatrical animation and the presence of a fierce competitor in DreamWorks Animation (NYSE:DWA).
Yesterday, I asked whether Disney would be overpaying for Pixar. In my opinion, it's not. However, with the buyout premium so meager, Pixar investors may be smarting as they wonder whether Disney is underpaying for Pixar. Again, it's not.
How can I play both sides? Well, this is a clear case where the two companies are more valuable together than apart. Pixar's creative mastery has been confined to theatrical animation and software development. Now it will be able to leverage that strength with key executive appointments to help invigorate everything from theme park ride development to Disney's own animation studio. If you think that Pixar and Disney together won't be worth more than their value as separate entities, you're missing out on this deal as the poster child for synergy.
Are Disney shares undervalued? There's little doubt about that. The stock is essentially trading where it was a few years ago, despite the turnaround at ABC, consistent gains at its theme parks, and improving the cost structure at its consumer products division by handing over its Disney Store empire to The Children's Place (NASDAQ:PLCE). The one missing link was the company's surprising irrelevance in the animation field it pioneered, and owning Pixar would lick that shortcoming right away.
Disney's recently depressed shares may lead some to question Disney's use of stock, rather than cash, to close the deal. I'd argue that Disney would have been hard-pressed to get out of its share price rut without coming to terms with Pixar. Disney also agreed to ramp up its share repurchase efforts through the end of the next fiscal year, buying back most -- if not all -- of the $7.5 billion in stock that will be printed once the deal is approved.
The happiest place on Earth? That must have been the Disney boardroom. CEO Bob Iger was able to engineer the deal that will cement his place as the ultimate bridge-builder after his predecessor Michael Eisner's rocky relationships with key content producers and executives at Disney.
Well done, Iger. Now it's just a matter of wondering if "to infinity, and beyond" will become his demand when it comes time to dish out fiscal 2006 performance bonuses.
Pixar and DreamWorks Animation have been winning recommendations for Motley Fool Stock Advisor subscribers.
Longtime Fool contributor Rick Munarriz is still a kid at heart, smitten over the right kind of animation. He owns shares in Disney and Pixar. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
