Disney Acquires 21st Century Fox

Disney, the world’s largest media company, completed the acquisition of yet another famous entertainment company—21 Century Fox, with nearly $66 billion. According to FT, this acquisition includes 39 percent stake in Sky, the pan-European broadcaster, and the 20th Century Fox movie studio.

Mickey Mouse should be the most popular original cartoon actor from Disney, which is the basement of future development in film entertainment. In 2006, Disney purchased the Pixar studio with $5.8 billion. The Pixar studio has the most advanced technique in animation, which create lots of famous film series like Monsters, Cars and Toy Story. This transaction makes great profits for Disney. Compared with the income of studio entertainment in 2005, which is only $207 million, the income in the same segment enjoyed an explosive growth in following two years ($729 million and $1.2 billion respectively). However, in 2008, an unexpected decrease in income forced Disney to think of the solutions. As the result, in 2009, another purchase on Marvel Entertainment was completed with only $3.8 billion. Ironically, this transaction was not expected an optimistic result by some analysts. With the popularity of Marvel superheroes, such as Iron Man, Captain America, Spiderman, Hulk and Thor, we realised this could be one of the most successful transactions for Disney. In 2014, the net income generated by the studio has increased to $1.5 billion and kept growing to $1.94 billion in 2016.

However, according to FT, at the end of fiscal 2017, cash and equivalents were $4.02 billion. Total debt stood at $25.3 billion, about 36% of total capitalization. Compared to a year ago, cash was down and debt was up. In the 2017 financial statement, there is a decreasing trend which is mainly due to the lower income in studio entertainment, especially in theatrical distribution which decreased by 60% in Q4 2017 compared with last quarter. So, this may be the main driver for Disney to acquire 21st Century Fox. Considering Disney’s other successful acquisition of Lucasfilm, Pixar, Marvel, this transaction will enforce its absolute power and advantages in film entertainment. Specifically, Disney acquired Lucasfilm five years ago, only The Force Awakens and Rogue delivered more than $3 billion at the box office and we believe this could establish a strong consolidation for the future; in terms of  the acquisition of  Marvel helped drive performance of studio of Disney since 2009, which generated an average of $840 million in each global box.; the acquisition of Pixar, which revitalized Disney’s animation business and contributed to more than $650 million in the average global box office. With the coming films, such as Star War, the last Jedi and the Marvel’s Avengers, Disney’s managers expect to reverse the decreasing trending in the studio segment.

While DIS reported worse than expected numbers, we believe that DIS is poised to report strong results in FY18 on the back of its upcoming content. Disney’s expected growth in 2018 is suppressed by following factors. First, the consolidation of BAMTech and its ongoing investment in the business.  We are also looking forward to the ESPN streaming service launch and whether that will help soothe worries about ESPN numbers. As such, we continue to be positive about DIS and believe that it remains a sound investment.

By Fu Jenhi and Mengxi Li.