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Fox deal positions Disney to tackle Netflix, analysts say


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Fox deal positions Disney to tackle Netflix, analysts say

While extolling the virtues of the expanded international reach and enhanced sports holdings that the company's $52.4 billion stock deal for a range of 21st Century Fox Inc. assets will bring, Walt Disney Co. Chairman and CEO Bob Iger left little doubt that the key driver behind the transformative transaction is boosting the company’s direct-to-consumer streaming offerings.

Iger, speaking during a Dec. 14 call announcing the deal, said "one of the most exciting aspects of our Fox acquisition is that it will allow us to greatly accelerate our direct-to-consumer strategy enabling us to better serve consumers around the world."

A deal of this size is going to receive significant regulatory scrutiny in the U.S. and abroad. "We believe that the regulatory authorities will look at this from a consumer point of view," Iger said. "And if they look at it from a customer point of view, they should quickly conclude that the aim of this combination is to create more high-quality product for consumers around the world and to deliver in far more innovative and more compelling ways."

Asked if there was a role for 21st Century Fox CEO James Murdoch at the expanded Disney, Iger said the two had many conversations throughout the sales process and Murdoch will be integral in helping the integration. "During that period of time, he and I will continue to discuss whether there is a role for him here or not, but I look forward to talking to him about it," he said.

Iger did not specifically address the executive management structure for the expanded Disney. But citing its acquisitions of Pixar, Marvel and Lucasfilm, he did say that Disney not only respected those companies' corporate cultures but their talent.

"Our approach to the talent at the company that we are buying is very, very similar. They have a lot of great talent," he said. "We, obviously, will work hard in the interim process working closely with Fox senior management to retain that talent and they will look for opportunities for all of them to grow within the larger company."

The deal would give Disney ownership of 60% of Hulu LLC, the streaming video service in which Disney, Fox and Comcast Corp. hold 30% stakes, while Time Warner has 10%. Coupled with its own ESPN and Disney-branded direct-to-consumer gambit, the company, which ended its distribution agreement with Netflix, could make a run at the streaming leader.

As part of the transaction, Disney will add 21st Century Fox's film and TV production businesses to its portfolio, units that are respectively home to such theatrical franchises as "Avatar," "X-Men," "Fantastic Four" and "Deadpool," and such acclaimed TV series as "The Simpsons," "Modern Family," "This Is Us" and "Homeland."

Those properties can be incorporated into Disney's entertainment-oriented direct-to-consumer service, which will include content from its Disney, Pixar, Marvel and Lucasfilm holdings.

Asked about balancing streaming initiatives with cable assets it is acquiring, Iger said FX Networks and National Geographic Channels are "fully complementary" to Disney’s plans to go over-the-top. As part of the plan, Disney will continue to work with legacy video distributors while creating direct-to-consumer streaming content.

"Additionally, in both Nat Geo's and FX's case, we buy production capabilities that can feed the direct-to-consumer offerings," Iger said.

RBC Capital Markets analyst Steven Cahall thinks Disney is headed in the right direction, writing in a note that there is "further upside to Disney longer term coming from the efficacy of the strategy, including a bigger [direct-to-consumer] platform benefiting from Hulu, FX and Nat Geo."

Michael Nathanson, senior research analyst at MoffettNathanson, also believes Disney's streaming initiatives are on target. "Disney’s true future will be tied to both its ability to roll out a global Disney brand of OTT service in 2019 and its new stewardship of Hulu and Fox TV assets," he wrote in a research note. Nathanson also wondered if the combination of the broadcast libraries will be deployed to launch a global Hulu service.

Although indicating that national content from ESPN could flow to the 22 regional sports networks that are part of the deal and some of that local content would wind up on ESPN, Iger does not envision the RSNs initially playing a major role on ESPN's branded streaming service.

"We are not currently anticipating a substantial value proposition in terms of the direct-to-consumer aspect of ESPN because the regional sports network will primarily be distributed as they have been distributed by multichannel providers," he said, before adding Disney would look to capitalize if there is an opportunity there down the road.

Lee Berke, president and CEO of consultancy LHB Sports, Entertainment & Media, in an interview said the regional sports networks' aspect of the deal makes "perfect sense," as Disney — when it owned MLB’s Angels and NHL’s Ducks franchises — was interested in starting its own network in the late 1990s. "Now, they get that and 21 others," he said.

Berke noted that while many of the Fox regional sports networks have long-term rights deals with clubs, he believes Disney faces some risk with this asset. An increasingly digital world could open the door to more teams starting their own networks via OTT platforms, compared with regional sports networks' traditional facilities-based operations.

CFO Christine McCarthy said on the call that the deal is expected to close within 12 to 18 months, at which time Disney will issue 515 million shares. 21st Century Fox shareholders would then own about 25% of the combined company and Disney shareholders the balance.

McCarthy said Disney estimates that the businesses it is acquiring generated about $19 billion in revenue and $4.2 billion in EBITDA during 21st Century Fox’s fiscal year ended June 30. She said that based on 21st Century Fox's management estimates, these businesses are expected to generate about $4.7 billion in EBITDA for calendar 2018. Disney expects to realize $2 billion in cost synergies by 2021.

The deal also gives Disney a broader international presence through Sky plc in Europe and Hot Star in India, in addition to its upcoming ESPN (US)- and Disney-branded offerings in 2018 and 2019, respectively.

The completion of the Sky acquisition, now expected to close by mid-2018, will be "fully managed by Fox management," with McCarthy noting that the Disney deal is not contingent upon the completion of the Sky purchase.