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Disney or Fox: Who Gains More From a Landmark Deal?

Swarup Gupta

It’s a win-win deal for all you Marvel fans out there. After years of speculation and what-if moments, the X-Men, Fantastic Four and Deadpool will finally join the rest of the Marvel juggernaut following the media deal of the year, if not the decade. But it is difficult to be similarly enthusiastic about The Walt Disney Company’s DIS $52.4 billion takeover of key Twenty-First Century Fox FOXA assets.

While Disney does gain many mouthwatering options, it remains to be seen how these assets will help it launch its own streaming offensive in 2019. And was the asset sale, Murdoch’s way of acknowledging that he’s largely quitting the entertainment side of things? The media mogul refused to acknowledge such feelings at a recent news conference saying:  “Are we retreating? Absolutely not.”

Has Disney Really Benefited?

Probably the biggest media player of them all at present, Disney’s performance on the bourses has lagged far behind its soaring ambition. Since late 2015, the stock assumed a sluggish trajectory and has gained only 4.4% over the last two years, underperforming the broader industry over this period. Disney has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

At the time of this acquisition, Disney is beset by several problems, particularly at ESPN where its subscriber base is shrinking even as it has to bear high programming costs.  Recently, it decided to terminate the distribution agreement with Netflix Inc. NFLX for subscription streaming and is on the verge of launching its own streaming services —one for Disney and Pixar brands and another for ESPN followers.

Disney does gain several key media assets as it prepares to launch its own streaming service. But is difficult to decipher how the large number of regional sporting networks it owns, reputedly worth nearly a third of the entire deal value,  will help in shoring up its losing TV business. Surely, all these businesses are also facing the prospect of a wave of ensuing cord cutting.

Further, the media behemoth now has access to Fox’s massive collection of movies and television programming. But what Disney needs to do at this point is to build a streaming service with a loyal customer base. Recent trends in this segment clearly point to a fragmented scenario where the popularity of niche offerings is rising.

Disney may be better off launching a more focused service and only time will tell how it  utilizes its new found assets. The acquisition of a large stake in Hulu, on the other hand, is more of a clear victory.

Intensifying Competition Forced Murdoch’s Hand?

The view on the Fox end of things is even less clear and the jury is still out on what forced Murdoch’s hand. Essentially, he has offered up to Disney the lion’s share of Fox’s media and entertainment assets. This is an unlikely move for a media baron who was well known for aggressive deal making. For instance, in 2014, Murdoch famously, and presciently, bid for Time Warner Inc. TWX.

But his confident posturing notwithstanding, the deal is probably a quiet acknowledgement of not only how much the media business has changed but also of how technology centric it has become. Further, the space has been marked by hectic acquisitions which have created even bigger media behemoths.

For instance, Verizon Communications Inc. VZ has acquired Huffington Post, AOL and Yahoo. Disney is an even stronger case in point, since it now owns not only Marvel but also Lucasfilm which makes the Star Wars motion pictures.

The sale of these Fox assets will allow Murdoch to focus on his beloved newspaper assets which includes the likes of the Wall Street Journal and The Times. This is Murdoch’s first love since he built his business from the lone paper in Adelaide that he inherited from his father.

Murdoch has indicated that he may merge New Fox, the entity to be created from surviving Twenty-First Century Fox assets with News Corporation NWSA or News Corp. Murdhoch’s heir apparent and his older son Lachlan has said: “The New Fox is about returning to our roots as a lean, aggressive, challenger brand.”

Personal Equations Also at Play

Industry watchers have also characterized the deal as a turning point in Murdoch’s relationship with his younger son James, the chief executive of 21st Century Fox. Apparently, differences between father and son have accumulated over the years, and are now difficult to resolve. Essentially, Murdoch believes his younger son failed to develop his empire’s entertainment assets to their full potential.

James Murdoch probably has a future at Disney and the media behemoth’s chairman Bob Iger has hinted at such a prospect. But at this point, their seems to be no clear and immediate winners from a deal which has captured the imagination of investors and industry watchers alike.  

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Time Warner Inc. (TWX) : Free Stock Analysis Report
Walt Disney Company (The) (DIS) : Free Stock Analysis Report
Netflix, Inc. (NFLX) : Free Stock Analysis Report
Verizon Communications Inc. (VZ) : Free Stock Analysis Report
Twenty-First Century Fox, Inc. (FOXA) : Free Stock Analysis Report
News Corporation (NWSA) : Free Stock Analysis Report
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