Winning the Fox bidding war is just the beginning
The higher the price, the less room for error managing and extracting value from assets
As bidding for 21st Century Fox’s assets has climbed, the room for error in managing and extracting value from them is shrinking. Disney’s latest offer of $71.3 billion in cash and stock is a 36% premium to its original offer of $52.4 billion. The price may go higher still if Comcast comes back with an offer in the $90 billion range.
Is the cost worth it, even for such scarce assets?
The market already seems uneasy every time the price tag increases; but the deal will be judged over several years, and its success will only become clear down the road, depending on what the buyer does with the assets. Still, a higher price raises the bar for the value that the buyer, be it Disney or Comcast, will need to extract to justify the cost.
Integrating the assets will be a massive undertaking made only more challenging by industry disruptions and fast-changing consumer habits. The buyer will be bringing under its umbrella the Fox film and TV studio, U.S. cable networks and regional sports networks, international assets including Sky and Star India and Fox’s one- third stake in the streaming service Hulu. (Disney has agreed to divest the regional sports networks to meet regulatory approval). What could go wrong? “The biggest risk is changing consumer habits and to what extent either can pivot a legacy business without seeing a deg- radation in their economics,” says John Janedis, a media analyst at Jefferies LLC.
As Disney attempts to launch two new streaming services, one for adults and one for children, and put all its content — including the Fox library — onto its own platforms, it will end its licensing agreements with other distributors such as Netflix. That will mean losing a huge source of revenue. Making up that loss will hinge on the company’s ability to draw subscribers to the new platforms.
Meanwhile, the winner of the bidding war will also have control of Hulu, yet another platform to manage. (Comcast and Disney each currently have a 30% stake, but acquiring Fox’s stake will bump that up to 60%). Owning a “disrupter” along with legacy assets prone to disruption brings unique challenges.
Then there is the question of just how much media-consumption habits may change in the next 10 or 15 years. Thinking back that many years is an instructive exercise in how quickly seemingly unassailable franchises can stumble while upstarts ascend.
At the moment, the consensus holds that the migration to streaming is likely to accelerate, especially as Amazon, Apple and others increase their content spending. That will be coupled by consumers’ desire to watch video in an ad-free environment.
As Netflix pumps up its spending, too, wooing Hollywood talent away from legacy media, the fight for dominance will get fierce.
Even with a much smaller bid, getting it wrong would be bad enough. This deal has far more serious consequences. Whoever buys the Fox assets at their sky-high price can count on one thing — having very little margin of safety.