Making a common cause to stay relevant

The prospective acquisition of 21st Century Fox – the third largest movie studio and entertainment business in Hollywood – by Disney has hit the world of business like a tsunami.

The ‘all-stock’ deal is valued at a $66.1 billion and Disney will acquire most of the entertainment and broadcast business of the company. The new company will have a collective revenue stream of over $75 billion and will dwarf all other competitors in the industry segment. The transaction is expected to take 12 to 18 months to complete, provided it is approved by a raft of regulators and clears a host of anti-trust legal challenges by various industry bodies. This being so, Disney will issue over 515 million shares to existing stockholders of 21st Century Fox, who will retain a 25% stake in the new, enlarged company. Disney’s Bob Iger will remain Chairman and CEO (reportedly at the request of stockholders and the board) at least until 2021.

Fox will part with all of their businesses and only retain its core news businesses: Fox News, Fox Sports and the Fox Business Networks.

What does this marriage bring to Disney and Fox? The answer is easier to explain for Disney. Acquisition of 21st Century Fox will build Disney’s considerable war chest of interesting stories and give them access to 20th Century Fox’s legacy content. Furthermore, Fox’s broadcasting network has a sizeable presence in some of the most important markets in the world, where Disney’s behemoth broadcasting business, which includes ESPN and ABC, can make inroads into. In the US, Fox will provide Disney access to their regional sports network and this is likely to increase the broadcast footprint of ESPN as well as provide new content inroads with Fox owned networks such as National Geographic/Nat-Geo, FX and Endemol Shine. Lastly, and perhaps most importantly, the real reason could be Fox’s success in the video streaming business, manifested in their 30% ownership of the popular digital entertainment and streaming service Hulu.

Industry insiders believe that the synergies in digital distribution, content generation and content consolidation constitute the real value for Disney, which have made no secret of their intent to launch a digital streaming service. The company has committed to pull out all their content from prospective rival Netflix by 2019. This has led to a flurry of in-house productions by Netflix to maintain their industry lead.

Disney is aware that the ‘cord cutting’ phenomenon in the US and the developed world, in favour of cheaper digital streaming options, is a danger to their broadcasting business model. The company still relies heavily on revenue from their TV networks, particularly ABC and ESPN, both of which are at risk of losing audiences to digital in the long-run, but which account for over a third of their asset base.

According to industry analysts, the two companies have come to the table for different reasons, but with a shared concern about their future viability and whether they can remain relevant in a world where the rules of the game are constantly changing.

By consolidating with Fox, Disney hopes to save over two billion dollars when they launch their digital streaming and subscription service, as well as provide customers with first rate content that will help attract a greater number of households. In an interview, Iger admitted that the new service will have neither the content base nor the scale of Netflix. The hope is to have unique content that will help Disney become a significant player over the next few years.

On the flipside of the transaction, what are the wins for Fox? Like Disney, Fox has been hit by the increase in cable cutting households, so partnering with Disney gives them the scale to compete in the digital realm and shift the focus to the news business, an area which the Murdoch family has excelled in. Furthermore, the transaction affords them and other Fox shareholders a solid 25% in a money-making company, giving them cash resources and a healthy stream of dividends.

According to industry analysts, the two companies have come to the table for different reasons, but with a shared concern about their future viability and whether they can remain relevant in a world where the rules of the game are constantly changing.