21st Century Fox adds value to Disney

Acquiring 21^st Century Fox adds value to Disney and demonstrates that Bob Iger is one of the smartest CEOs around today. In fact, Disney’s purchase of 21^st Century Fox (NYSE: FOX) is a far better deal than many suspect.

To explain, the Walt Disney Company (NYSE: DIS) is gaining the most lucrative assets at Fox while avoiding the problem children. Notably, the acquisition does not include Fox’s dying broadcast and cable news business.

The acquisition closed Tuesday March 19 and took effect on Thursday March 21, Variety reports. Uniquely, Fox shareholders will receive $38 a share in cash and stock. Moreover, Disney plans to issue 343 million new DIS shares for Fox shareholders.

How 21^st Century Fox adds value to Disney

Here are some Fox assets Disney is buying for $71.3 billion in cash and stock and $13.8 billion in debt:

• The historic 20^th Century Fox movie and TV studios that date back to the 1930s. Hence, Disney will finally control one of the great Hollywood studios of the Golden Age. In addition, a predecessor to 20^th Century Fox; Fox Studios, dates back to Hollywood’s Silent Era.

Movie and TV rights to major Marvel super heroes; including the Wolverine, the X-Men, Deadpool, the New Mutants, the Starjammers, Cable, the Fantastic Four, and possibly the She-Hulk. Therefore, Wolverine, the She-Hulk, and Storm can appear in the Fifth Avengers film – if they make one.

Movie and TV rights to major Marvel super villains including Doctor Doom, Mr. Sinister, the Black Queen, and Magneto. Note of these I think Dr. Doom, Mr. Sinister, and the Black Queen are the big money characters. Thus, Iron Man could fight Doctor Doom in his next movie.

Movie and TV rights to major franchises including Buffy the Vampire Slayer, the Planet of the Apes, Predator, Alien, Avatar, the X-Files, and a couple I probably forgot.

A library of classic TV shows and movies that Disney can stream or remake. In particular, such classic properties as Butch Cassidy and the Sundance Kid, The X-Files, and Doctor Doolittle, are crying out for remakes.

Another 30% of the Hulu streaming service which has 25 million subscribers according to Variety. Thus, Disney will own 60% of Hulu which generated $1.5 billion in ad revenue in 2018, Variety estimates. Uniquely Hulu grew at a rate of 45% in 2018 but lost $440 million during 3^rd Quarter 2018.

Hence, Disney CEO Bob Iger is getting a lot for the $85.1 billion. Impressively, Iger is able to buy Fox without its most troublesome assets.

21^st Century Fox adds value to Disney without Fox News

Interestingly, Disney avoids the worst Fox properties because they are being spun off into a new entity called the Fox Corporation. Impressively, Iger bought Fox without touching its worst asset Fox News.

The controversial and much-hated Fox News Channel is having a hard time keeping advertisers, The Guardian reports. In fact Variety reports Fox News is having difficulty selling advertising on one of its flagship shows Tucker Carlson Tonight.

For instance, major advertisers refuse to buy airtime on Carlson’s program. Advertisers are avoiding Fox News because of its coziness with the unpopular Trump administration, controversial stands taken by some hosts, and alleged racist and sexist remarks.

Carlson, in particular, is offending viewers on both sides of the political aisle with diatribes against capitalism; and big business, and remarks that many critics construe as racist. Not surprisingly, Fox News is facing boycott efforts and criticism from leftists and some conservatives.

Under these circumstances, I think Iger is making a very smart move by refusing to touch Fox News.

21^st Century Fox adds Value to Disney by dumping broadcast

Moreover, Iger is avoiding a potentially greater problem in the form of Fox’s dying broadcast TV network and sports operations. Like Fox News, the Fox Network and sports will be part of the Fox Corporation.

Unfortunately, details on the Fox Corporation’s assets are scarce, but its website is in operation. My guess is the Fox Corporation will own sports, broadcast, and Fox News judging by the website.

However, the ratings show that the Fox Network is sinking fast. For instance, viewership for Fox’s flagship drama Empire fell by 11.32% between the 2017-2018 and 2018-2019 TV seasons.

The Ratings demonstrate Disney was smart to Say no to the Fox Network

Moreover, TVseriesfinale.com estimates Empire’s viewership in the all-important 18 to 49-year-old demographic fell by 17.5% during the same period.

Meanwhile, overall ratings for just one of Fox’s top five shows; the legendary Simpsons, grew between the last two seasons. In fact, The Simpsons ratings grew by 6.02%, however that boost probably comes from the hype surrounding the cartoon’s 25^Th anniversary.

Tellingly, Fox’s top show, Empire attracted just 5.016 million viewers during the week that ended on 14 March 2019. Plus, Empire attracts just 1.52 million 18-to 49-year old viewers.

Even NFL Football; traditionally a ratings powerhouse, is having trouble attracting viewers. Oddly, NFL ratings are up impressively but advertising revenues are falling, The Wrap claims. In fact, the NFL’s ad revenues fell by 19% during first two months of the 2018-2019 season.

Notably, NFL ratings grew by around 5% for the average 2018 game, SportsMediaWatch estimates. However, the growth is not enough to make up for the 16% ratings drop in the 2016 and 2017 seasons.

21^st Century Fox Makes Disney a better Value Investment

I think the way 21^st Century Fox adds value to Disney makes a good value investment better. In fact, I believe Disney will make money from the 21^st Century Fox assets while avoiding the company’s problems.

For instance, Disney can avoid expensive legal conflicts with anti-trust regulators and politicians by not owning two broadcast networks. Notably, Disney already owns ABC, so it has no need for a second broadcast network.

The numbers show Disney is a good value investment that will get better with 21^st Century Fox. For instance, Disney records a gross profit of $6.302 billion, an operating income of $3.418 billion, and a net income of $2.788 billion for 4^th Quarter 2018.

Disney is making a lot of money without 21^st Century Fox

Moreover, Disney’s revenues grew from $14.307 billion in 3^rd Quarter 2018 to $15.303 billion in 4^th Quarter 2018. Hence, Disney is already making a lot of money and growing its revenues without the 21^st Century Fox assets.

Not surprisingly, Disney is generating a lot of cash from its entertainment business. For example, Disney reports an operating cash flow of $2.099 billion and a free cash flow of $904 million for 4^th Quarter 2018. In addition, Disney had $4.455 billion in cash and equivalents and $10.123 billion in receivables on 31 December 2018.

These numbers show how good Disney is at monetizing entertainment assets. Thus, acquiring 21^st Century Fox adds value to Disney by giving it more entertainment assets to monetize. For example, Disney can produce big budget She-Hulk or Starjammers movies to cash in on those characters.

Disney is a great dividend stock

Finally, the 21^st Century Fox acquisition makes a great dividend stock even better.

In particular, Disney shareholders were enjoying a 1.55% dividend yield, a $1.76 annualized payout, a 25.4% payout ration and two years of dividend growth on 14 March 2019. Plus, Disney shareholders took home an 88¢ dividend on 10 January 2019.

Impressively that dividend grew by 10¢ over the past two-and-a-half years. To clarify, DIS paid a 78¢ dividend on 27 July 2017 that grew to 84¢ in July 2018 and 88¢ in January 2019. Thus, I think DIS was a bargain at $113.30 a share on 18 March 2019.

Hence, Disney is a superb dividend stock that could get better because of the 21^st Century Fox deal. Under these circumstances, the 21^st Century Fox shareholders who get paid in stock are the real winners from the acquisition.