Disney's (DIS) acquisition of much of the 21st Century Fox (FOXA) assets now seems secure, albeit significantly more expensive, at $ 71.3 billion in stock and cash compared to the original $ 52.4 billion before Comcast & # 39; s (CMCSA) intervention. As Disney currently essentially acquires assets that are comparable to its own size, the leverage and stakes of the company are extremely high.
In contrast, Disney now also has immense potential to use these assets not only for revenue and income were under the control of Fox, but to create a scenario "total is greater than the parts" in which the intellectual property rights, studios, channels and services (such as Hulu) can be linked to Disney's massive entertainment ecosystem.
The company can now combine rights and channels that expand into a fairly significant part of television viewers, more than half of the box office receipts, ensure an effective start to its streaming service, increase its direct to consumers, a d wins clearly. Entertainment is a tough business, and growth is unstable and volatile, but I think Disney will be able to make some moderate gains from all this time in the near future.
A merger just in time for Disney's Streaming Service
It is worth noting that the deal does not appear to be fully completed and will be completed by early 2019, just a few months before Disney's anticipated launch of its streaming service mid to late 2019. Nonetheless, it seems To be sure, since it seems that no other company would have the resources or a particular use for the assets of 21st Century Fox in the same way as Disney, as the bidding war with Comcast has shown.
However, we can now begin to think about what this merger means to the company as it gets closer. I've already talked about how a big benefit of the acquisition will be the immense range of intellectual property rights that Disney will acquire, which it can then use not only for its current television and studio properties, but also a strong launch for his streaming service.
The upgrade to Disney's enterprise-wide rating for a truly successful streaming service remains very uncertain. On a positive note, Netflix (NFLX), which offers only one streaming service, temporarily outperformed Disney's market capitalization earlier this year, still moving around $ 150 billion.
Netflix also generated $ 11.692 billion in revenue for 2017. Adopting an even 50% similar translation to Disney, this would moderately boost Disney's $ 55.137 billion in revenue in 2017.
On the negative side, a streaming service might not be so much in a valuation gain for Disney as for Netflix – which, if it did, would almost double Disney's current price would mean. This is due to the fact that, as I have been discussing for a long time, Netflix has been overrated in recent years on the basis of, in my opinion, too optimistic growth projections and a massively inflated P / E ratio of 200 to 300. By comparison, Disney's P / E ratio remains at 17.60.
Netflix's net income, a barometer of the profitability of a Disney streaming service, is apparently still extremely low for Disney, even for corporate profits. Netflix's net income in 2017 was $ 558.929 million, compared to $ 8.980 billion. Therefore, if we fully included Netflix in Disney based on those numbers, this would translate into a 21.2% increase in revenue, but only a 6.2% gain.
(Source: The Week)
In addition, Disney assumes the same order of magnitude as Netflix 100 million + subscribers then and 130 million + now. A streaming service can take some time to shop, even with Disney's all-star content library.
On the plus side for Disney's streaming service, there may be advantages in both competition and costs. It has already been discovered that Disney is quickly withdrawing content from Netflix, putting the company in a dry phase and possibly encouraging subscribers to switch to Disney more easily.
Another reason for Netflix's small profit margins is the immense amount of money it has to spend on content, both in terms of acquisition and licensing and production. Disney could be less costly because it already produces all the content it would likely use and has almost all the relevant intellectual property rights. The margin could therefore be larger and bring Disney a bigger profit than the current business model of Netflix would predict. Conclusion
As shown above, with the upcoming Disney acquisition of 21st Century Fox, not only will the company be increasingly expanding, both positively and negatively, but it may also generate some "total is greater than the parts" profits for its streaming service launch as well as other studios, parks, consumer products and TV properties.
The Influence of A Disney Streaming Service remains highly uncertain, but I think that even in the medium term, Disney may be moderately positive, with potential large market penetration and potentially higher margins compared to Netflix.
If this proves to be true, it could mean a longer-term growth potential for Disney that does not bring as much value to the valuation as Netflix's current $ 150 billion, but still might have little value.
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Disclosure: I am / we are long FDN.
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