Disney, Fox deal confirmed
December 14, 2017
In an move that complements and enhances The Walt Disney Company’s ability to provide consumers around the world with more appealing content and entertainment options, the entertainment giant has agreed to acquire 21st Century Fox, including the Twentieth Century Fox Film and Television studios, along with cable and international TV businesses, for $52.4 billion in stock. Including $13.7 billion in debt, the total transaction value is $66.1 billion.
The deal expands Disney’s direct-to-consumer offerings with addition of 21st Century Fox’s entertainment content, capabilities in the Americas, Europe and Asia and its stake in OTT service Hulu becomes a controlling interest.
Disney will consolidate its position as the world’s largest media company if the deal is cleared, adding Fox’s 39 per cent stake in Sky, the pan-European broadcaster, and the 20th Century Fox movie studio to a huge catalogue of brands and intellectual properties.
“The acquisition of this stellar collection of businesses from 21st Century Fox reflects the increasing consumer demand for a rich diversity of entertainment experiences that are more compelling, accessible and convenient than ever before,” said Robert A. Iger, Chairman and Chief Executive Officer, The Walt Disney Company. “We’re honoured and grateful that Rupert Murdoch has entrusted us with the future of businesses he spent a lifetime building, and we’re excited about this extraordinary opportunity to significantly increase our portfolio of well-loved franchises and branded content to greatly enhance our growing direct-to-consumer offerings. The deal will also substantially expand our international reach, allowing us to offer world-class storytelling and innovative distribution platforms to more consumers in key markets around the world.”
“We are extremely proud of all that we have built at 21st Century Fox, and I firmly believe that this combination with Disney will unlock even more value for shareholders as the new Disney continues to set the pace in what is an exciting and dynamic industry,” said Rupert Murdoch, Executive Chairman of 21st Century Fox. “Furthermore, I’m convinced that this combination, under Bob Iger’s leadership, will be one of the greatest companies in the world. I’m grateful and encouraged that Bob has agreed to stay on, and is committed to succeeding with a combined team that is second to none.”
At the request of both 21st Century Fox and the Disney Board of Directors, Mr. Iger has agreed to continue as Chairman and Chief Executive Officer of The Walt Disney Company through the end of calendar year 2021.
“When considering this strategic acquisition, it was important to the Board that Bob remain as Chairman and CEO through 2021 to provide the vision and proven leadership required to successfully complete and integrate such a massive, complex undertaking,” said Orin C. Smith, Lead Independent Director of the Disney Board. “We share the belief of our counterparts at 21st Century Fox that extending his tenure is in the best interests of our company and our shareholders, and will be critical to Disney’s ability to effectively drive long-term value from this extraordinary acquisition.”
The pair say the acquisition will enable Disney to accelerate its use of innovative technologies, including its BAMTECH platform, to create more ways for its storytellers to entertain and connect directly with audiences while providing more choices for how they consume content. The complementary offerings of each company enhance Disney’s development of films, television programming and related products to provide consumers with a more enjoyable and immersive entertainment experience.
Bringing on board 21st Century Fox’s entertainment content and capabilities, along with its broad international footprint and a world-class team of managers and storytellers, will allow Disney to further its efforts to provide a more compelling entertainment experience through its direct-to-consumer (DTC) offerings. This transaction will enable Disney’s recently announced Disney and ESPN-branded DTC offerings, as well as Hulu, to create more appealing and engaging experiences, delivering content, entertainment and sports to consumers around the world wherever and however they want to enjoy it.
Adding 21st Century Fox’s premier international properties enhances Disney’s position as a truly global entertainment company with authentic local production and consumer services across high-growth regions, including a richer array of local, national and global sporting events that ESPN can make available to fans around the world. The transaction boosts Disney’s international revenue mix and exposure.
Disney’s international reach would greatly expand through the addition of Sky, which serves nearly 23 million households in the UK, Ireland, Germany, Austria and Italy; Fox Networks International, with more than 350 channels in 170 countries; and Star India, which operates 69 channels reaching 720 million viewers a month across India and more than 100 other countries.
Prior to the close of the transaction, it is anticipated that 21st Century Fox will seek to complete its planned acquisition of the 61 per cent of Sky it doesn’t already own. 21st Century Fox says it remains fully committed to completing the current Sky offer and anticipates that, subject to the necessary regulatory consents, the transaction will close by June 30th 2018. Assuming 21st Century Fox completes its acquisition of Sky prior to closing of the transaction, The Walt Disney Company would assume full ownership of Sky, including the assumption of its outstanding debt, upon closing.
According Paolo Pescatore, Vice President, Multiplay and Media, CCS Insight, the deal is all about Disney taking greater control of its destiny throughout the entire value chain, from content production to distribution. “Even a giant like Disney has not been immune to changing behavioural patterns as consumers have embraced new ways of watching TV shows and movies,” he suggested. The move will firmly establish Disney as one of the leading media companies in the world and puts it in a great position to compete head on with the threat posed by the Web providers such as Amazon and Facebook. With its slew of franchises, which will continue to grow, it is well placed to generate new sources of revenue. Further disruption lies ahead and we believe that this acquisition will force others to react,” he concluded.
According to analysts at IHS Markit, the speed with which this deal – effectively merging two of the Hollywood major studios – has been agreed is as breath-taking as its sheer size. At is heart, the merger is based on the rationale that large scale is vital for media companies to thrive in the fast-developing global media market. In July 2014, it emerged that Fox had made an offer to acquire Time Warner. The planned takeover did not materialise, and Time Warner subsequently became an acquisition target for AT&T.
Speaking at the RTS conference in Cambridge this September, CEO James Murdoch argued that ‘the freedom to take risks and the strength to compete… only comes from global scale. Scale provides the confidence to invest strategically, take risks, and support the development of new technologies and innovation – critical attributes in this dynamic period’.
IHS Markit estimates the combined revenues of the two companies (excluding the FOX broadcasting business) at $54.5 billion over the 12 months to 30 September, with Sky adding a further $16.5 billion. This compares to $31.6 billion for Time Warner and $27.7 billion for NBC Universal over the same period. The combined group will thus be considerably larger than any of its main US-based competitors, with a considerable international footprint as well as a powerful position in the US market.
The analysts offer a few thoughts about the impact on the main business lines of the new group.
Disney has historically released fewer films than Fox both in the US and in the overseas territories where they have operations. In 2016, Disney released 13 films in the US and 21 in the UK, compared to Fox’s 17 and 42 films respectively. However, Disney’s slate has been more lucrative as a result of having more high-grossing films: in the US, the average box office earnings per Disney’s released films has been 39 per cent higher on average than that of Fox from 2007 to 2014 – and 79% if we include the two years with the last Star Wars franchise releases.
When combined, the market share of both studios in box office terms reached 39.2 per cent in the US in 2016 and 27 per cent on average in the previous five years. That would give them a significant lead over Warner Bros. (15.7 per cent on average in the last five years) and Universal (14% per cent), but not large enough to be a reason for concern for US antitrust regulators. In non-domestic territories there is a similar pattern, with the combined market share reaching 30 per cent or more in some past years in the UK, Spain, Australia, Brazil, Russia, Mexico, Argentina and Colombia.
There are many assets in the Fox library that would add value to Disney’s existing collection of properties. The Avatar franchise is due to come back to the big screen in 2020 with the first of four sequels. From an operations perspective, in the film sector there will be a clear overlap in both production and distribution if the slate of films becomes one.
It is likely that the number of films produced will be reduced by focusing on the higher-earning franchises and distilling only those more profitable from the rest of the development slate. As for distribution, both studios have operations in many territories with overlapping capacities to handle film releases, so it is likely that operations will be merged and streamlined.
On the TV side, both Disney and Fox commission the majority of their programming in-house. Of the 30 scripted series produced by Disney-owned producers in 2016, 26 aired on Disney-owned (or co-owned) channels and just four on rival channels. For Fox television production, 32 productions out of 47 series in 2016 were for Fox/FX Networks (15 for other networks). With FOX spinning off into a separate company, there is a question mark about whether the Fox production operations will be able to maintain the same level of output. On this morning’s conference call, Rupert Murdoch commented that FOX would be able to order programming from production companies not affiliated with a network – Warner Bros and Sony. However, 20th Century Fox Studios produces Modern Family for ABC – a key hit show for the network.
The two companies’ channel portfolios are largely complementary, with the only significant overlaps being sports and very young children.
In sports, ESPN is the market-leading sports network in the US but has scaled back its international activities to Latin America and Australia and New Zealand. Fox, meanwhile, operates under the Fox Sports brand in most global regions (its Australian Fox-branded channels are owned by News Corp). Fox also operates premium sports channels in Italy and the Netherlands (a long-term joint venture with the Dutch football league).
Of the other Fox channel brands, National Geographic channel looks most complementary to the focus of the Disney-branded channels on families and children. The young adult focus of the FOX (outside the US) and FX channels represent an audience niche that has not been targeted by Disney so far.
The most important channels market for both groups outside the US is India, where Fox owns Star India and Disney owns UTV. Both groups are among the market leaders in the free-to-air market, with Star’s ownership of key sports rights including India’s wildly popular national sport, cricket, giving it a particularly strong position. ESPN is currently in partnership with Sony in India in the Sony ESPN sports channel. Previously, it was a partner with Star in Asia until it sold its 50% stake in their joint venture in 2012.
The full takeover of Sky by Fox has been snagged by the ownership link to the News Corp newspapers (including the best-selling tabloid The Sun and the London Times) and the association with Fox News. Ownership by Disney will remove both of these issues at a stroke – although Fox management was confident this morning that the UK government will approve the takeover by the end of June anyway.
In Sky, Disney would acquire a successful TV business, but one facing similar challenges to the Hollywood studio – in particular, maintaining growth in an increasingly online-led TV market. Both companies have laid out increasingly aggressive strategies for capturing customer relationships outside the traditional pay-TV ecosystem: Sky operates standalone ‘pay TV lite’ services Now TV (UK, Ireland and Italy) and Sky Ticket (Germany and Austria); while Disney runs direct-to-consumer (D2C) offerings in Europe, including DisneyLife in the UK and ESPN Player across the EMEA region. Disney is also embarking on a D2C strategy in its home market of the US, which will see ESPN and Disney-branded services launched in early 2018 and 2019 respectively.
Potential synergies between Sky’s standalone OTT products and Disney’s D2C offerings are likely to be sought by Disney, which will gain access to a wealth of customer data from an operator that serves 23 million households across five markets. Immediate benefits for Disney in terms of leveraging the Sky’s traditional Sky pay TV proposition are less obvious, with Disney already benefiting from a long-standing relationship with the DTH operator – it distributes a full bouquet of channels and comprehensive on-demand offering on Sky’s platforms, including a co-branded service, Sky Cinema Disney, and prominently-featured kids channels.
While Sky already has an ownership link with a studio supplier in the form of 20th Century Fox, there will be angst on the part of rival studios about the strengthened relationship between their largest Hollywood competitor and one of their key customers.
Another issue is how Disney shareholders will feel about Sky’s massive ongoing investments in non-US sports rights, a major part of its cost base. Bidding for the next contract for the Premier League is about to start (the rights are expected to be awarded in February). In the last round, Sky upped its bid for rights by 83% to £1.4 billion a year. A new deal for Serie A in Italy is also upcoming. ESPN may also have to review its deal with Sky rival BT Sport, which operates a premium sport channel with ESPN branding in the UK and Ireland.
Disney will assume a controlling 60 per cent stake in Hulu on completion of the acquisition. Launching to consumers in 2008, the streaming service is an equal-parts venture between Disney, Fox and Comcast, with Turner taking a smaller 10 per cent stake. Serving as a (fairly successful) response to perceived threats from new online players and cord-cutting, the service will now be faced with two immediate problems.
First, the service has always been led and controlled by the three main stakeholders, while Turner acted as a silent partner. With Disney now in control, Comcast will be left with an effectively unusable 30 per cent voting share. Second, Disney has made apparent its desire to break away from the now-incumbent major online players by launching its own D2C services. The media giant has been carefully re-positioning itself by launching subscription players, driving the industry’s digital ownership strategies, and investing in new playout technologies and infrastructure. However, Hulu now sits slightly at odds with this, as it is not a Disney-branded consumer platform, but a ‘safe space’ designed to allow frenemies to work together safely.
A solution to these issues is likely to come in the form of further ownership transfer. It is unlikely that Comcast will want to keep its share unless Disney: concedes favourable terms in control; grants generous compensation; sells some of its stake back to Comcast; or finds a new third partner. Disney, being a notoriously protective company, is unlikely to want to launch its future digital service on a platform without a Disney brand, and significant partner investment, and so will either want to re-position and re-brand Hulu, or will wish to rid itself of what may become a cannibalistic and conflicting service.