by Marina Pomerantz, Portfolio Manager, Trimark Investments, Invesco Canada
One of the worst kept secrets on Wall Street was confirmed on Thursday, when it was announced that Disney would buy a substantial portion of the entertainment assets of 21st Century Fox Inc.
The Trimark investment philosophy favours companies that have dominant positions in their markets and purchase of key Fox assets would certainly solidify Disney’s dominance in the sports and entertainment industry.
While the deal is still subject to shareholder approval, some of the Fox assets that Disney is seeking to purchase include:
- the Fox film and TV studio business
- Fox’s regional sports networks as well as the FX and National Geographic cable TV networks
- Fox’s 39% stake in European satellite and broadcast TV provider Sky
- Fox’s 20% stake in Tata Sky, a joint venture between Fox and the Tata Group, which provides satellite TV services in India
- Star India, an Indian media and entertainment company
- Fox’s 30% stake in Hulu, the U.S. over-the-top streaming entertainment service that is co-owned by Disney, Fox, NBC, and Time Warner
Bob Iger, Disney’s CEO, has been talking about the need for media companies to address evolving consumer preferences for some time. Increasingly viewers are looking to choose the content they consume and they may prefer to watch this content outside of the traditional TV ecosystem. The Disney/Fox deal achieves several objectives in helping Disney provide premium content to consumers through a variety of distribution models.
First, the deal would boost Disney’s output in both film and TV content, and consolidate movie rights for certain Marvel Studios and LucasFilm titles under one roof. The deal would also broaden Disney’s capabilities to offer direct-to-consumer programming through its own controlled distribution – either through an over-the-top (OTT) streaming service or through traditional satellite Pay TV packages. Finally, the deal would give Disney international reach into Western Europe, India and some Latin American markets, where it could leverage Fox’s TV networks and other media assets to cross-sell Disney’s own content.
Below are a few additional details why I believe the long-term strategic implications of the deal are positive for Disney:
More high value film and TV content. The deal would significantly expand Disney’s trove of content, as the Fox studio business has ownership of very strong global film franchises like Avatar, Fantastic Four and X-Men, which would bolster Disney’s library of intellectual property and provide plenty of runway to expand the franchises both at the box office and with theme park attractions. Fox’s movie studio owns rights to certain Marvel film titles, like X-Men and Deadpool. Also, Fox’s film studio owns the rights to Star Wars Episode IV, and with all original Star Wars episodes under Disney’s control, the company could launch a series of remakes, which should further boost Disney’s movie and theme park businesses.
Fox’s TV studios have been responsible for the creation of popular series like The Simpsons, Modern Family, This is Us, MasterChef and Dancing with the Stars, which could be complementary to Disney’s family programming. The Fox TV studio business also owns more adult-focused content like Homeland and The Americans, which diversifies Disney into adjacent content areas.
Significant global scale in sports. Fox’s 22 regional sports networks give Disney immediate scale in sports programming by combining leading national sports network, ESPN, with one of the largest collections of regional sports channels in the country. Ownership of regional sports networks can stabilize ratings – if ESPN ratings are down because of a less popular sporting matchup, ratings at the regional sports networks, which have local matchups that are highly relevant to local audiences, may be higher.
Also Fox’s regional sports networks give Disney access to some of the most popular regional sports events in the U.S., which could draw incremental viewers to Disney’s channels and also help Disney deliver attractive content when it launches an over-the-top ESPN streaming app. Internationally, Disney’s decision to acquire Fox’s stake in Sky and Star India would give it access to digital streaming rights for soccer, cricket, rugby and basketball in European and Indian markets that value this sports content, and in the future this content could be included in Disney’s over-the-top streaming bundles.
Access to new subscribers and valuable insights about the direct-to-consumer business. The deal would also give Disney access to retail distribution of TV content through the ownership of Sky, Tata Sky, and Hulu, which combined have well over 30 million subscribers in the U.S., Western Europe and India. These businesses align well with Disney’s previously stated strategy of selling content directly to consumers through its own over-the-top streaming service (expected to be launched in 2019).
These businesses would give Disney a large base of subscribers to whom Disney can cross-sell its streaming service when it is ready. Also, Disney would be able to create its own Pay TV bundles and sell them to consumers in the U.S. through Hulu’s distribution.
And finally, since Disney would own 40% of Sky, it would obtain key data about the TV distribution business that could be leveraged in Disney’s over-the-top streaming products in the U.S. and in other markets. Prior to the Disney/Fox transaction being announced 21st Century Fox was in talks to acquire the remaining 61% of Sky it did not own, and if this transaction goes through Disney would potentially be able to increase the proportion of Disney content that is made available to Sky subscribers.
This post was originally published at Invesco Canada Blog
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