For Disney chief Bob Iger, Fox deal is all about future of TV

[LOS ANGELES] When news broke last month that Walt Disney Co was in talks to buy a large of part of 21st Century Fox Inc, the first question many investors had was, why are the Murdochs selling? Then came the second: Why is Disney buying?

The US$50 billion deal, which could be announced this week, would mark a significant turning point in the empire-building career of Fox's founder and executive chairman, 86-year-old Rupert Murdoch. It would also be a defining moment for Disney and its Chief Executive Officer Robert Iger.

Mr Iger has built a reputation over the past 12 years for making bold bets, including the US$7.4 billion he paid for Pixar animation just months after he became CEO. But this would be much bigger, giving the home of Mickey Mouse and Princess Elsa the 20th Century Fox film studio, the FX network, 39 percent of Britain's Sky Plc TV service and other assets. It's just the kind of consolidation media investors have said was long overdue, particularly in film.

"There's a lot of synergies in doing this, particularly in global distribution," said Mario Gabelli, whose Gamco Investors Inc. holds more than US$350 million of Fox shares. "If I'm Disney I love the distribution globally, India, satellites in Italy, Germany, England. This is good stuff." Disney could shave as much as US$500 million annually in costs by combining businesses, according to Alan Gould, an analyst with Rosenblatt Securities Inc. Half of that would come from the studio side, where Disney could close and sell the Fox lot in Los Angeles, he said in a Dec. 4 note.

The timing is opportune, Mr Gould said, because other potential bidders for Fox, including Verizon Communications Inc., may be hesitant to do a big deal given AT&T Inc.'s current fight with the Justice Department over its proposed US$85.4 billion acquisition of Time Warner Inc. Comcast Corp. said Monday that it considered a Fox deal, but never made an offer.

Acquiring the Fox assets fits two of Mr Iger's big-picture initiatives. One is to bulk up on content, particularly franchises beloved by filmgoers all over the world. Acquisitions he's made in the past, such as Lucasfilm and Marvel Entertainment, have allowed Disney to dominate the box office for the past two years.

The Fox studio would give Disney more such franchises, including "Avatar," "Planet of the Apes" and the X-Men comic book characters. At Disney, Mr Iger scaled back film releases, focusing on a handful of key brands. His strategy with the Fox assets could be very similar, using the 20th Century Fox label for some of the more edgy movies, for example.

"They have the capital and scale and distribution power that Fox is lacking," said Hal Vogel, an analyst and author of "Entertainment Industry Economics: A Guide for Financial Analysis." "Fox can continue in the business for quite a long time. but Disney has much bigger scale potential. They have the capital they can pour into it. They can exploit it more effectively, through merchandising and theme parks." That also explains why Mr Murdoch is open to parting with a portion of his media empire. The billionaire has been frustrated with the market undervaluing his assets, and is willing to reshape his empire if he can get what he thinks the holdings are worth, according to a person familiar with the matter.

Mr Iger's other major strategic initiative is to cut out the middle man and establish a relationship directly with consumers. Here the Fox assets fit as well, such as doubling Disney's stake in the Hulu streaming service to 60 per cent and acquiring a big chunk of Sky, which offers pay TV service to 22.5 million customers in five countries in Europe.

And as Mr Iger prepares to launch two online subscription TV services in the U.S., one for ESPN next year and one for Disney-branded movies and shows in 2019, Fox assets could give him more to fill those pipes and more opportunity to offset the loss of subscribers to Disney's traditional TV channels, according to Macquarie Capital analyst Amy Yong.

"For Disney, scale and distribution together matter more now, and this would give it both in droves," Yong said in a Dec. 6 note.

There's always a chance that Disney takes on too much by trying to merge distinctly different companies. Fox, with hits such as "Deadpool" and "The Simpsons," has always had a more irreverent streak than Disney, which works hard to protect its family-friendly image.

Seeing through a complicated merger may be just what's needed to convince Mr Iger to stay beyond his scheduled July 2019 retirement. That would be fine with many investors.

"We would be very happy with Bob Iger at the helm of Disney for an extended period of time," said Richard "Trip" Miller, a managing partner at Gullane Capital Partners in Memphis. "His ability to grow long-term shareholder value via operating discipline and strategic acquisitions allows us to sleep well at night."

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