FOXA and DIS Transaction Considerations - Pivotal Research

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As news emerges with clarity around the specifics of a transaction involving Fox and Disney, we highlight in this note a range of considerations we have contemplated in association with the expected deal over the past several weeks.

In this note we review the following considerations related to a potential transaction between Disney and Fox including:

  • Market concentration among content packagers would be increased, but the market for premium video remains relatively fragmented.
  • Advertising market impact is probably limited, as the combined entity would still be smaller in the US than NBCU and Viacom.
  • If Disney and Fox avoid competing with each other for sports rights, they may benefit, but still have to compete with Comcast, CBS, AT&T/Time Warner, Facebook, Google, Amazon and others.
  • Disney’s direct-to-consumer content distribution acquisitions potentially help establish a portfolio of approaches.
  • While the stub of Fox may lose scale and related efficiencies with the transaction, it may benefit from focus, financial leverage and changes to US media ownership rules.
  • International exposure is likely positive for Disney; the loss of international exposure is negative for Fox.
  • Management succession resolution would be positive for Disney.
  • Margin erosion is still likely to occur on an ongoing basis for the combined entity.

Further details around these issues follow in the remainder of this report.

VALUATION. We value companies on a DCF basis. Key variables driving valuations across the agency holding companies include long-term costs of capital ranging from 11.5% for Disney to 13.0% for Viacom, with other companies in the peer group at 12.0% to 9.7% for Disney. Long-term growth rates range from 3.5% for Viacom to 5.0% for Disney.

RISKS. Risks to companies in the sector include the hit-driven nature of video production, threats to TV advertising and a pay TV slowdown.


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