- KPB & Co Research
As media companies face-off in the war to grow their content catalog, the cost of that content keeps going up. Streaming companies such as Netflix, Amazon and Hulu are already spending between US$2Bn to US$8Bn on original content, up significantly relative to prior years. Lately, Disney was forced to up its offer price for 21st Century Fox by 35% to US$71.3Bn, in the face of a rival bid from Comcast. With this tectonic shift in the landscape of the media industry, investors will be scratching their heads to see how they can profit from the reshaping of the industry. Over the last decade, Disney under the leadership Bob Iger has built-up an unequaled content catalog, which puts them in a unique position to add value to shareholders without much threats to their business model. Now, that Disney going into another transformative deal there may other angles through which investors can profit, one of which is through spin-offs.
The first round of deal talks led to Disney agreeing to sell some divisions of Fox to meet regulatory hurdles. Shortly after announcing its revised offer price, Disney increased the number of dispositions expected. Now the media company expects to Divest business generating over a billion dollars in EBITDA - (Earnings Before Interest Taxes and Depreciation & Amortization) coming from US$500Mn under the previous deal. Under the revised deal, Disney is required to divest 22 regional sports networks within 90 days of the consummation of the deal. The new 21st century fox have also been reshaped which could present an opportunity, as the resulting strategic shift and sharper focus could enhance the use of capital. Under the deal the new fox will be comprised of Fox Sports along with Fox News and the Fox Broadcast Network (see below info graphic of old deal).
With valuations this stretched, Investors would be right in questioning whether the post-merger Disney will be in an attractive situation, as the the additional US$18Bn comes with significantly more debt. Nevertheless, over the years CEO Bob Iger has shown enormous success in making acquisitions work for Disney. They acquired Marvel Entertainment, Lucas Films, and Pixar Animation Studios, all of which have generated strong free cashflows for a very long time. The company will also be in a better position to put out a more competitive offering in the digital streaming space that can compete with the likes of Netflix, after all they will end up with one of the strongest content catalogs in the business.