Disney - Fox deal a media and entertainment earthquake

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By 2017-12-15

By Hadas Gold

If all goes as the media world expects, at some point this week or next Disney will announce that it is purchasing a large chunk of 21st Century Fox in what would be one of the largest media deals in recent years.
If the deal goes through, Disney will take ownership of one of the United States' largest movie studios, including franchises like the blockbusters based on the Marvel Universe, as well as television channels like FX and National Geographic and a majority ownership of streaming service Hulu, among many other properties.

It would also be a monumental deal for 21st Century Fox (FOX), significantly changing the company's trajectory and Chief Executive Rupert Murdoch's legacy. And, analysts say, the fact that talks have come so far is indicative of the changing media environment, and that this could be a prescient move by a company better known for acquiring assets than selling.

If the deal proceeds along the lines that have been reported in the media, including by CNNMoney, Disney will be taking on 21st Century Fox's studio and television production companies including its 20th Century Fox Film Corporation, National Geographic, its regional sports networks, and its stakes in Sky and Hulu. 21st Century Fox would keep its news divisions including Fox News and Fox Business, as well as its broadcast network and the local stations it owns and the cable channel Fox Sports.

The deal would be subject to regulatory approval and is likely to take about one year to close.
BTIG media and technology analyst Richard Greenfield believes history will look "favourably" upon the Murdoch family for knowing when to sell, and that Disney may be making the wrong move.

"Disney is doubling down on its own troubled asset base," Greenfield said, referring to its sports-heavy cable network portfolio, including ESPN, which has been going through a down period recently. "Buying Fox would add regional sports network, would add Sky Sports, Star Sports, basically expand the ESPN problem not just in the US but globally."
Greenfield believes that Disney (DIS) adding Fox's movie studios "makes perfect sense" from a business perspective, but that it also carries with it meaningful regulatory risk considering Disney is already so dominant in that space, owning not just its titular studio but also others like Lucas Films, Marvel and Pixar.

The sale is an "absolutely brilliant move by the Murdoch family," Greenfield said, because it gets them a good price before their industry declines any further. "This is the perfect time to be getting out." Greenfield said. "Selling now versus waiting for the bundle, or God forbid an Apple or Amazon start buying sports rights, the whole cable bundle could collapse. Trying to get out now is absolutely the right move."

Still, there are clearly reasons why Disney would want to do this deal. For one, it will double its stake in Hulu with the acquisition, becoming majority owner. And as Disney prepares to launch its own over the top streaming services in 2019, it could become a more formidable foe for the likes of Netflix (NFLX) by combining its existing content with Fox's movie, television and sports content. Brian Weiser, senior research analyst for the Pivotal Research Group, said Disney will likely now have improved leverage while negotiating with cable and new media distributors, as well as improved capacity to make more content and multiple approaches for going direct to consumer with their content.

"With Disney there are synergies and value in getting bigger and getting a successor, if they clarify who will succeed Bob Iger," Wieser said, referring to some reports that suggest 21st Century Fox CEO James Murdoch could move to Disney with a senior role as a result of the deal. "There's also value in getting more kicks at the can of figuring out what the optimal direct to consumer is for the top delivery of content."

As for Fox, Wieser said the smaller entity could see some advantages from putting more concentrated attention on the news business, perhaps even integrating the Fox News channel more with its Fox broadcast stations.

Fox could expand its broadcast operations, helped along by a Federal Communications Commission vote on Thursday altering and possibly killing the national limit on local television station ownership. And with Sinclair Broadcasting Group posing a potential challenge to the dominance of Fox News, Fox could "nip that in the bud by taking a superior broadcast footprint," Wieser noted.
Observers have speculated that the remains of Fox would recombine with the Murdochs' News Corp, the company that owns properties like the Wall Street Journal, New York Post and Harper Collins, which 21st Century Fox split from in 2013.

"It seems highly likely," Wieser said. "It's safe to say there are synergies between newspapers, broadcast stations and news gathering operations. There is value to be created on that basis alone."

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