Any stock that is basically flat this year has, by definition, underperformed, and that is certainly the case with Disney (DIS). On the first day of trading in 2017, DIS closed at 106.08 and closed yesterday at 106.83. Given that the S&P 500 is up over eighteen percent in the same period that is, to say the very least, disappointing.
The reasons for that underperformance are well known. “Cord cutting” is now a part of the lexicon in America, and Disney’s former stars, ESPN and ABC, are feeling its effects. Streaming services are offering great content whenever you want it and viewing habits have changed.
All of this is true, and when considered together makes it hard to muster up enthusiasm for Disney, or indeed any conventional media company, but that could change rapidly if their potential deal with 21st Century Fox goes through.
Fox has decided that their response to the pressure on media companies will be to become more focused on sports and news, and in order to do so, they have been exploring a sale of most of the company. Their studios, non-sports and news cable channels, and international networks such as Sky in the UK and Star in India are all up for sale.
Disney takes the opposite view of the best way to deal with the industry’s challenges. They believe that buying those assets and consolidating in a way that takes on the likes of Netflix (NFLX) head-on is the better approach. Others agree; when Fox first let it be known that parts of the company were for sale, Comcast (CMCSA) and Verizon (VZ) joined Disney in expressing an interest.
The initial round of talks with Disney last month broke down, leaving Disney looking like the least likely buyer, but last week they were back on and now this morning we hear that Comcast is the one pulling out.
There is still the chance that someone else will end up with the assets, but the reason given by Comcast for their withdrawal from the process, a “lack of engagement” from Fox, suggests that Disney will be the eventual winners. That seems to confirm the rumors that have been around for a while that Rupert Murdoch, and his sons, would prefer a sale to Disney over any other.
They reportedly would rather be paid in Disney stock than in CMCSA or VZ and there are also stories that the deal will involve a role at Disney for James Murdoch, Fox’s current CEO. As anyone that has followed the fortunes of Fox over the years knows, what the Murdochs want, they usually get, so a sale to Disney is extremely likely.
That would leave Disney with a massively expanded back catalog of content and the rights to several blockbuster franchises including X-Men and The Fantastic Four. More importantly, they would have the means to exploit that catalog and take on the streaming services from Netflix, Amazon (AMZN) and others directly, as Fox’s thirty percent ownership of Hulu would also be part of the deal. Acquiring that would give Disney a majority sixty percent of Hulu and allow them to use it as a vehicle for their content.
Some would no doubt point out that, even as an agreement is reached, the deal would still have to get regulatory approval, so this not a sure thing. That is always the case but if anything, the regulatory situation makes a deal with Disney more, not less, likely. If Comcast or Verizon won out, it would create a situation similar to that between AT&T (T) and Time Warner Cable that is currently being opposed by the justice department, whereas consolidation of similar businesses would avoid the issues of vertical integration in media that have prompted that opposition.
Call me a cynic if you will, but I believe it is also likely that a Fox-approved deal would be looked on more favorably by this administration than one involving the owners of NBC.
So, Disney looks almost certain to emerge as the buyer of Fox’s assets, and likely to see little or no opposition to the deal from a regulatory standpoint. What remains to be seen is whether Disney’s plan to take on streaming services head on is a viable one. Given the catalog that will be available to them and Disney’s history of creativity however, I wouldn’t want to bet against them, and buying DIS as all of this unfolds looks like a smart move.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.