A pair of Wall Street pros are playing matchmaker, suggesting that it's logical for Apple (NASDAQ:AAPL) to acquire Disney (NYSE:DIS). RBC Capital analysts Steven Cahall and Amit Daryanani, covering Disney and Apple, respectively, are pondering the potential pairing of the two corporate behemoths.
The argument is based on the relaxation of cash repatriation taxation laws, freeing Apple to get creative with the massive sums of money that it's stockpiling overseas. Content-hungry Apple would strike the mother lode if it snapped up the global darling behind the biggest movies, most popular theme parks, and leading sports network. We haven't even gotten to Disney's undisputed market leadership in family friendly entertainment and its massive vault of content.
It's a juicy notion, but it's not going to happen. Anything is possible. Daryanani argues that the proposed acquisition is "greater than 0%" but that's a mathematical formula that applies to nearly all scenarios. Let's go over a few of the reasons why reality may be closer to 0%.
1. Apple may not be able to afford Disney
Both analysts agree that Apple would have to pay about a 40% premium for Disney, a markup that would prop up Disney's enterprise value to roughly $270 billion. Apple is closing in on $250 billion in cash and marketable securities on its books, and it's obviously not going to get turned down if it wants to borrow some money or raise funds. However, why would Disney settle for a 40% premium for a deal that will take a long time to close -- if it closes at all.
Legislation under the current regime may pave the way for smoother repatriation of cash earned overseas, but antitrust regulators can be meticulous and slow. We've seen some deals take as long as two years to close, and the acquisition targets in that time often wither in a rudderless state. Do you really think that regulators will simply sign off on the world's most valuable consumer electronics company shacking up with the world's most valuable content producer? This is going to be a long process, and a target that isn't out of favor is going to want more than just a 40% premium to take on the risk of time wasted and value shaved if a combination falls through.
2. Apple isn't going to play favorites
We've seen that "content is king" for platform operators, but the same mantra may not apply to the companies making the hardware. Apple would be grabbing amazing content if it snapped up the House of Mouse. Beyond Disney's decades of homegrown brilliance we're talking about the Marvel, Lucasfilm, and Pixar content that's dominant at the box office these days. However, it comes at a price beyond the buyout premium. Rival studios will not be happy.
Apple needs media companies to play nice with its iTunes ecosystem, and that's already a challenge. Imagine how easy it will be for non-Disney studios to strike deals that enrich rival platforms since playing nice with Apple only fortifies Disney's parent. Apple needs to tread carefully if it starts going down the content acquisition rabbit hole.
Apple and Disney would make the ultimate Hollywood couple, but Appney os Disple just isn't going to happen.