Disney-Fox Reality Check: A Combined Business Will Benefit From the Sale, But Only After a Continuous Spending Session – Analyst



When Disney's $ 71.3 billion deal to acquire substantially all of 21st Century Fox will be closed in the coming weeks, the merged company will remain an attractive target for investors, but only those who are willing to agree heavy short-term expenses in direct distribution to consumers.

That's what we need to learn from a new research report by Macquarie analysts Tim Nollen and Stephen Beckett. In their 18-page customer note, analysts reiterate their "outperformance" of the title, which has rocked since Disney triumphed over Comcast last July in the final battle of the Murdoch family's jewels. Macquarie's target price for 12 months is $ 125. Disney closed today at $ 113.51, up almost 1%.

The mega agreement will redraw the Hollywood card and transfer to Disney such things as the Fox movie and TV studio and cable networks such as FX, while giving it majority control of Hulu.

"Strategically, Disney is doing the right thing, but financially, we do not see a positive catalyst in the short term," warns the report, adding that "flat" profits in the coming quarters are likely. Once Fox joins the group, analysts warn of several headwinds. These include the cost of integrating the two companies, higher debt, an additional 30% of Hulu losing money, and interest charges if the regional sports networks that Disney has to sell have a price too modest.

Given that many details about 2019 and beyond are unclear, at least until the day of investors on April 11, analysts present the combined portfolios and review all put options.

Their "cautious case" sees a profit of 4% in 2019 and 5% in 2020, excluding costs of integration. Once the losses of Hulu and Disney + are moderate, the synergies would start to increase profits in 2021, 22 and 23 by 2%, 9% and 11%, respectively. Analysts, including integration costs, see no loss of profit by 2022.

On the other hand, in their optimistic scenario, Hulu's losses would be more moderate than expected and RSNs would have a price higher than the current $ 15 billion forecast. The operation would then become neutral for the year 2020 earnings, adding 9% in 2021 and high percentages of teenagers thereafter.

Nollen and Beckett estimate that operating income is expected to reach $ 200 million in the quarter as a result of investments in ESPN + and Disney +. Launched last spring, ESPN + has exceeded 2 million subscribers, but its exploitation is expensive because of sports rights broadcast rights. The Company estimates that maintaining Disney + Disney movie and television license fees for Disney + will result in a $ 150 million loss of operating income in fiscal 2019.

"There could be up to 18 films and 16 television series being developed for [Disney+]In addition, we expect some licensed content to be purchased or repurchased from other retail outlets, while Disney is looking to fill programming gaps before launching the service later this year, "analysts said. .

Nollen and Beckett highlight CBS 'recent progress in the field of streaming, indicating that Disney could potentially double its number of subscribers combined each year. Analysts predict a "maybe conservative" number of year 1 out of 2.5 million Disney + subscribers.

As for Hulu, the pair expects the streaming service to finally break even in 2022, with an estimated 50 million subscribers. Last month, the group recorded a surpassing 25 million subscribers, up 48% from the same level in 2018. Comcast and WarnerMedia remain minority stakeholders in Hulu.


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