Market Insight

Disney agrees to buy Fox entertainment assets for $52 billion

December 14, 2017


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Walt Disney Company has agreed to acquire most of 21st Century Fox’s assets, including the 20th Century Fox film studio, most of its cable networks, a 39% stake in European pay TV business Sky and a 30% stake in Hulu. 

Disney will pay $52.4 billion in stock (subject to adjustments) with 21st Century Fox shareholders receiving 0.2745 Disney shares for each Fox share. Disney said it will issue new shares for Fox shareholders, representing a stake of approximately 25%. Disney will also assume $13.7 billion of net debt.

The assets to be acquired are the 20th Century Fox movie and TV production arms, the cable TV channel brands FX Networks and National Geographic Cable Group, international TV operations including Indian subsidiaries Star and Tata Sky. Equity interests include the 39% stake in Sky, a 50% stake in international TV production company Endemol Shine, and a 30% stake in US over-the-top service Hulu.

Fox said that it would seek to complete its planned acquisition of the 61% of Sky that it does not own, anticipating that this will close by 30 June next year.

Assets not included in the deal are the FOX broadcast network and US TV stations, cable channels Fox News and Fox Business and the FS1, FS2 and Big Ten Network US sports channels. Immediately before the acquisition, these assets will be spun off into a newly-listed company.

The transaction is subject to approval by shareholders of both Disney and Fox as well as regulators in the US and elsewhere. Robert Iger will stay on as Chairman and CEO of The Walt Disney Company until 2021.

News of negotiations between 21st Century Fox and Walt Disney first emerged early in November. At the time the talks were said to have been broken off, but last week it emerged they were back on, and moving quickly towards today's conclusion.

Comcast, the US cable company that owns NBC Universal, also considered a bid but dropped out this week. For full report, including data and charts please click here.

Our analysis

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.

We will be analysing the new combination in more detail in an insight report, but for now here are a few thoughts about the impact on the main business lines of the new group.

Filmed entertainment

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% 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% in the US in 2016 and 27% on average in the previous five years. That would give them a significant lead over Warner Bros. (15.7% on average in the last five years) and Universal (14%), 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% 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.

Cable networks

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.

Sky

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.

Hulu

Disney will assume a controlling 60% 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% 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% 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.

Endemol Shine

Both 20th Century Fox Studios and ABC Studios production (Disney) are predominantly US-focused while Endemol Shine is a global producer (in 2016 it produced one scripted title for US TV, but 21 scripted series in major non-US territories and online). By contrast Fox-owned US studios and Disney-owned producers only produced five titles outside the US in 2016. Acquiring Endemol Shine will give Disney a significant presence in non-US television production that it does not currently possess.
 

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