I recently completed a fundamental analysis of Disney’s (DIS) acquisition of 21st Century Fox. This article will include my thoughts and notes on the acquisition of 21st Century Fox assets by The Walt Disney Company.
Most of this analysis is based upon the proposed merger document dated June 28th, 2018 by The Walt Disney Company and 21st Century Fox. An original copy of this document is available from the SEC Edgar system.
All images included are snippets from the public SEC merger documentation.
My thoughts on Disney’s Acquisition of 21st Century Fox
Disney originally sought to purchase Fox assets at a value of $23 per share (Oct 27th, 2017 at a $60 billion Enterprise Value). They ended up acquiring Fox assets 65% higher at $38 per share.
This is a huge price discrepancy.
The acquisition of 21st Century Fox will lower Disney’s Earnings per Share in the short-term
In addition, Disney’s earnings per share are expected to drop immediately after the acquisition of Fox. While this poses a long-term positive for Disney assuming they can make synergies work, this is a significant risk. Disney heavily diluted shareholders by approximately 20% with the acquisition. There is a large risk that Disney shareholders will be harmed at least in the short-term by this acquisition due to the high price paid.
Disney engaged in a bidding war for 21st Century Fox’s assets against Comcast and an undisclosed 3rd party
The fact that Disney had to engage in a bidding war for the acquisition of 21st Century Fox assets and that debt was used to make the purchase is concerning. The usage of both debt and equity is not ideal in achieving a positive outcome for shareholders.
Disney was in a bidding war with Comcast.
Comcast offered $34.41 per share on November 14th, 2017.
On November 19th, 2017, Disney raised its offer to $28 per share representing an Enterprise Value of $66 billion for the assets.
This offer of $28 per share was agreed to and reported via press release on December 14th, 2017.
On June 13th, 2018 Comcast made a $35 per share offer for the equity of Fox, with an equity value of $65 billion.
On June 19th, 2018, Disney upped its offer to $38 per share for the equity of Fox with an equity value of $71.3 billion. (Note the change from Enterprise value to equity value)
Notes on the valuation of 21st Century Fox assets
Goldman Sachs believed RemainCo was worth between $25.36-$33.87 per share. Goldman Sacks used discount rates of 6.75-7.75% and perpetual growth rates of 2-2.5%.
Disney’s representatives:
I am skeptical about the acquisition of Fox by Disney and the price paid. While it is clear that this acquisition will prove useful strategically in the long-term, I am unsure that Disney’s shareholders will benefit more than if the acquisition had never occurred.
The recent run-up in stock price leads me to believe it might be best to sit out owning Disney stock for the next few years as the attempt to harness synergies plays out. I like Disney as a business, but the expansion into more cable networks is not my preferred use of Disney cash and leverage.
The equity dilution is particularly concerning. EPS will drop for Disney this year. The stock is likely to fall from its current high.
I also have better alternatives than investing in a stock trading at a P/E of 20. I am likely to materially improve my investment performance by selling Disney and investing the after-tax money into stocks that trade in the 5-10x PE range.
