Will the $71.3 billion purchase of Walt Disney Co. be successful? on 21st Century Fox?
Or will the 2019 acquisition turn out to be Disney CEO Bob Iger’s biggest mistake?
Activist investor Nelson Peltz championed Iger’s decision to load up on content for the streaming wars by buying Rupert Murdoch’s TV and movie studios and other entertainment assets after engaging in heated debate.
Peltz, through his Third Fund Management, accused Disney executives of showing “poor judgment” by “materially overpaying Fox’s assets.” Earlier this month, his firm dropped its proxy fight against Disney.
But the hangover from the Fox deal has come into sharp focus this month in light of Iger’s dramatic plan to cut $5.5 billion in costs, including eliminating 7,000 jobs. It is one of the biggest cuts in the history of the entertainment company, which cut thousands of jobs after the Fox deal.
Undoubtedly, the purchase of Murdoch’s studios allowed Disney to acquire valuable franchises, including the longest-running television show, “The Simpsons,” as well as the movie juggernaut “Avatar,” which gave Disney a share of the $2.2 billion in worldwide box office receipts from “Avatar: Waterway.” Disney also picked up the original “Star Wars” movie as well as “X-Men,” “Fantastic Four” and “Deadpool,” allowing those characters to join Disney’s Marvel Cinematic Universe.
The cable channels National Geographic and FX also joined the market, along with proven leaders in the television industry.
They were all involved in adding to Disney’s content pipeline.
But some Wall Street critics argue that the acquisition, and the integration of the Fox team and operations into Disney, distracted the Burbank entertainment giant from its core mission of creating quality family entertainment.
Cowen & Co. media analyst Doug Creutz was never sold on the Fox deal and is now partly to blame for Disney’s current troubles, which include managing an even larger portfolio of linear cable TV channels that decline and absorb billion dollar losses as the company builds one. but four streaming services to compete with Netflix, Amazon Prime Video and others.
In addition to Disney+, Disney operates ESPN+ and Hulu as well as Disney+ streaming service Hotstar in India.
“Even without Fox, Disney would still be struggling with linear channels and figuring out how to make streaming profitable,” Creutz said. “But they would be in a much better position, financially, without all this debt on their balance sheet. And they wouldn’t need as much reorganization.”
Disney declined to comment for this story.
A lot has changed since Iger revealed the Fox takeover in December 2017.
At the time, Wall Street was high on the future of streaming companies. Iger and Murdoch initially agreed on a $52.4 billion all-stock deal for Fox, which some observers said would be a coup for Disney.
But Comcast CEO Brian Roberts was drawn into a bidding war by Iger, who offered Murdoch much more money. To reach the deal, Disney eventually agreed to pay $71.3 billion. (In addition, Disney took on nearly $14 billion in Fox debt, according to company documents.)
Comcast paid Disney $15 billion for Fox’s ownership stake in Sky.
Antitrust regulators also forced Disney to sell another asset – Fox’s regional sports networks that carry local games of professional hockey, basketball and baseball teams. The government refused to allow Disney to own ESPN and more than 20 regional sports channels, so Disney auctioned off the channels, including the YES network that carries the New York Yankees, for more than $10 billion.
Taking proceeds from those asset sales, Disney deals Fox for $57 billion.
“Even that was too much – too much,” said Creutz.
The lingering problem is the debt. In 2018 regulatory filings, Disney said it planned to take on up to $36 billion in debt to cover the money market and stock market for Murdoch and its shareholders (Regulatory filings show the company actually took on about $26 billion ).
Then, a year after the Fox deal closed, Disney was rocked by the global pandemic — closing theme parks, movie theaters and sports attractions — and was forced to take on more debt. As of last quarter, Disney’s debt stood at $45 billion.
When the Fox deal was finalized in March 2019, Iger said in a statement, “Disney and Fox’s unmatched collection of businesses and franchises will allow us to create more engaging, high-quality content, expand our direct-to-consumer offerings and our international presence, and deliver more personalized and compelling entertainment experiences to meet growing demand from consumers around the world.”
Disney also offered Fox library titles to international Disney+ customers.
Disney + has more than 160 million subscribers worldwide.
People close to the company said the Fox deal accelerated Disney’s jump into streaming, giving it an edge over rivals like Warner Bros., NBCUniversal and Paramount.
Yale School of Management Senior Associate Dean Jeffrey Sonnenfeld called the Fox deal “brilliant.”
“Was it a high cost? Yes, but you don’t consider investment as a business expense but against the return on the investment,” he said.
Sonnenfeld said the Fox assets could bring unexpected rewards for Disney down the line, and cited an obscure historical reference: the 1867 purchase of Alaska from Russia for $7.2 million.
“Of course, gold was discovered later, triggering a gold rush,” Sonnenfeld said. “Can you imagine if Putin (Russian President Vladimir) controlled that real estate now?”
Disney’s purchase of Fox kept the assets, including the popular streaming service Hulu, out of the hands of Comcast or another media rival.
On the latest earnings call, Iger told analysts that the company is devoting fewer resources to making general entertainment content. But one of the main reasons for buying Fox was to increase Disney’s arsenal of general entertainment content.
“That begs the question: So why did you buy a Fox?” Creutz asked.
Iger also seems to be questioning the value of Hulu. Two-thirds of the leading general entertainment streaming service is currently built by Fox, NBCUniversal and Disney; The other third is owned by Comcast.
Earlier this month, Iger told CNBC that “everything is on the table” as he looks to make cuts, fueling speculation in Hollywood about Hulu’s future.
Disney has already promised to pay Comcast $9 billion for its 33% stake in Hulu by January. If Comcast wants to exercise its sale option, that would give Disney 100% control, but it might look to sell the platform.
“The question for Disney is: Do they want to be a large-scale entertainment company or the mother of all niche entertainment companies with family-friendly entertainment,” said Jason Kilar, the former WarnerMedia chief executive who built Hulu. “Either approach can be successful and both involve different content, but that’s the big question that hasn’t been answered definitively.”
Kilar predicts that by the end of the decade, there will be a handful of entertainment companies capable of generating more than $10 billion in cash flow annually from their streaming operations.
“If 21st Century Fox ends up being the difference maker to help Disney cement its status in the winner’s circle, it will be worth it,” Kilar said.