Rumours have surfaced once again of a potential deal between Disney and 21st Century Fox, with the house of Mickey Mouse reportedly after $50bn of Fox’s $60bn total assets. It would include Fox’s film studio, cable channels such as FX, and international businesses including India’s Star network and yes, its 39% stake in Sky.
The deal raises a few questions. Why is Rupert Murdoch, a man who built an empire - and tremendous influence - through savvy acquisitions, suddenly open to selling so much of it? What does this mean for Fox’s long-contested plan to buy out the remaining 61% of Sky, a it has clamoured after since 2011? Wasn’t the Sky deal meant to be the icing on the cake, Murdoch’s parting gift to his sons James and Lachlan?
Of the several potential reasons why this deal could go ahead, the one that stands out is Fox’s recognition of its limits. When Murdoch attempted to buy Time Warner in 2014 for a rumoured $80bn, the deal wasn’t just rejected because it was too low: investors balked at the Murdochs’ substantial influence over Fox - they hold 40% of the voting shares despite owning just 17% of the company.
There’s also worry over Fox’s reliance on a pay-for-TV subscription model that appears vulnerable in the era of Netflix. No fewer than 22.2 million Americans ‘cut the cord’ - canceled cable in favour of an internet-based, typically on-demand service - in 2016, according to eMarketer.
‘Younger audiences continue to switch to either exclusively watching OTT (over the top) video or watching them in combination with free TV options,’ said Chris Bendtsen, senior forecasting analyst at eMarketer. ‘Last year, even the Olympics and presidential elections could not prevent younger audiences from abandoning pay TV.’
Fox has said it is well equipped to ‘embrace industry transformation head-on,’ but a deal with Disney would seem to suggest the opposite. Fox has significant scale, but Disney is a bigger and altogether different beast, possessing a library large enough to form the basis of a viable alternative to Netflix or Amazon. Indeed, Disney is set to launch its service with original content of its own as it pulls its content away from Netflix - to add Fox’s media to that library would make it even more formidable.
‘Both have pursued global strategies in a world in which OTT services will become much more significant,’said Claire Enders, founder of Enders Analysis. ‘The fact is that Disney is alone in the world as having a massive brand that works on a global basis and has a clear family identity. For Fox to sell makes a great deal of sense. Both are at different ends of the scale with Fox is barely hanging onto its 12% box office share.’
It’s unclear as to the role the Sky deal would play at this early stage, but if - as the Murdochs are confident of happening - the deal goes through, Disney will also have the benefit of increased distribution in Europe. Disney will also be aware of the Fox-owned Star network’s presence in Asia.
Sceptics of the deal include both fans and analysts. Fans worry about Disney’s apparent aversion to making R-rated adult movies (well, some fans do…). Disney’s massive range of existing properties such as Star Wars and Marvel sits at odds with Fox’s more adult-oriented offerings, including FX and National Geographic. Would they be incorporated into Disney’s brand, or left to operate independently?
Analysts question what exactly Disney is planning to do with the additional cable networks, one of the weakest arms of both companies.
‘Investors who are bullish on Disney like it for the non-TV assets,’ wrote Cowen analyst Doug Creutz. ‘Why would Disney want to increase its exposure to TV? Disney already has plenty of scale, so adding scale isn't that helpful (and it makes the business more difficult to manage).’
A deal of this size would be unprecedented, and is likely to attract the attention of regulators who last month cracked down on AT&T’s proposed $84bn takeover of Time Warner.
If it does happen though, all eyes will be on how it is packaged. Will the Murdochs become members of the Magic Kingdom? Will there be an Avengers/Avatar cross-over? Only time will tell.
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