December 14, 2017

Breakingviews: Disney Deal Widens Murdoch Legacy Erases Discount

by Breakingviews

Walt Disney is expanding its Magic Kingdom to include the Murdoch empire. It is paying $52.4 billion in stock to own a slimmed-down Twenty-First Century Fox, including the movie studio and a 39 percent stake in Sky. It’s a historic deal for media mogul Rupert Murdoch – and it should erase the discount afflicting his long-suffering shareholders.

It is, as Murdoch put it, a “momentous” moment for the media conglomerate he spent decades building. He is more often the aggressor than the target, latterly alongside his sons, Lachlan and James. Controlling some 40 percent of Fox voting shares has allowed him to prowl for deals without much interference. However, that’s also why Fox has traded at a discount to its peers – roughly 30 percent, give or take, by various calculations over the years.

Other assets that will go with Fox to the $160 billion Disney include regional sports networks, cable channel FX and Star India. The rest of the Murdoch vehicle’s properties, including Fox News, will be spun off into a new company before the sale to Disney is consummated.

The numbers are complicated, but including the Sky stake and a 30 percent share of Hulu, Breakingviews calculates the assets going to Disney could be worth about $58 billion in enterprise value. It’s paying $66.1 billion including assumed debt, more than the entire Fox was worth, including net debt, in early November before deal talks were first reported.

The new Fox spinoff, using similar calculations which draw on analysis by MoffetNathanson and Bernstein, should be worth around $31 billion in enterprise value – assuming Murdoch’s continuing role doesn’t perpetuate a discount there. Add the two and subtract total net debt of around $15 billion and the $8.5 billion Disney suggests will go out in taxes, and today’s Fox shareholders may end up with Disney and “New Fox” stock worth an estimated $74 billion.

At some $40 a share, that would be a 60 percent uplift from the value of Fox stock early last month. Even with less generous assumptions, the likely outcome easily wipes out the Murdoch discount.

Disney CEO Bob Iger, meanwhile, has found a way to extend his tenure again. He’ll now stay until 2021. Among other things, he is promising $2 billion of cost savings. Before that, the deal may face antitrust questions. And by the time he does quit, it’s possible James Murdoch will be a candidate to succeed him. Along with “New Fox” and the newspaper-heavy News Corp, that would be a new kind of Murdoch legacy.


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