FY2018 is off to an excellent start for The Walt Disney Company (NYSE:DIS) with a confluence of growth catalysts via streaming, studio strength, Fox acquisition and tax reform legislation. Disney has been establishing a firm footing in the streaming space via Hulu (30% stake and will likely be expanded to a majority 60% stake after the Fox acquisition), BAMTech, Sling, ESPN streaming service and a Disney branded service coming in 2019. The studio segment is off to a great start with record-breaking movie releases such as Thor: Ragnarok and Star Wars: The Last Jedi surpassing $850 and $900 million in worldwide box office receipts, respectively. Disney is evolving to address the deteriorating Media Networks business segment with major streaming initiatives. Disney has one of its biggest movie slates for FY2018 with Blank Panther, The Avengers: Infinity War and Solo: A Star Wars Story around the corner. Disney also announced that it is acquiring 21st Century Fox’s assets to further drive growth for $52 billion. This acquisition brings in noteworthy studio assets such as more Marvel properties (X-Men, Fantastic 4 and Suicide Squad) and Avatar along with TV content, regional sports and a 60% majority stake in Hulu. Disney currently pays a 33% effective tax rate and now with tax reform signed into law; this rate will be dramatically reduced a third to 21%. Disney can deploy more cash into growth initiatives and return value to shareholders via increased dividends and share buybacks with the increased cash flow. Disney offers a compelling long-term investment opportunity considering the growth, Fox acquisition, pipeline, Media Networks remediation plan, diversity of its portfolio, tax reform, share repurchase program and dividend growth.
Transformative Fox Acquisition
Disney shelled out $52 billion to acquire many of Fox’s assets to drive future growth in regional sports, movies, TV programming and foreign market penetration. This is a transformative acquisition as Disney will take control of the movie studio and significant TV production assets and gain exposure to international markets through Fox’s networks via a 39% ownership of Sky (Figures 1, 2 and 3). In addition to the movie studio, TV production and international assets such as Star and Sky, Disney will also add entertainment networks such as FX and National Geographic. Bob Iger stated that the deal should close in 12-18 months and highlighted the chance to expand Fox's Avatar franchise particularly considering new theme park lands. In addition to expanding the Marvel Universe via X-Men, Fantastic Four, and Deadpool, Disney will obtain Fox's distribution rights to the first Star Wars film. The deal will be accretive to EPS for the second fiscal year after closing, says Disney CFO Christine McCarthy, and Disney expects roughly $2B in cost synergies by 2021. Taking a majority stake in Hulu will further accelerate Disney’s streaming capabilities and compete directly with Netflix (NFLX). Taking majority control of Hulu is going to be beneficial and result in "flowing more content in Hulu's direction," and managing Hulu "becomes a little more clear, a little more effective." Turning to sports, combining Fox’s sports content with Disney’s ESPN will be synergistic and a "perfect complement" to ESPN's offerings, which are national in nature and will benefit from regional focus, Iger says. Continue reading "Disney: Fox Acquisition, Streaming, and Tax Reform"