June 21, 2018

Breakingviews: Disney Dazzle Murdoch

by Breakingviews.

Walt Disney has hurled magic and moolah to woo the Murdochs. The Mouse House leapfrogged Comcast by raising its offer for parts of Twenty-First Century Fox to $71 billion, including a generous dollop of cash. Disney has room to go higher still. The cable firm may yet go hostile but would be better off focusing its efforts on Sky.

Disney Chief Executive Bob Iger raised his original December bid for Fox’s cable networks, movie studios and international assets to $38 per share from $28 on Wednesday. And Fox shareholders will have the option to take 50 percent in greenbacks. The new entreaty is 9 percent above the $65 billion all-cash offer Comcast made last week.

Fox’s board of directors, chaired by Rupert Murdoch and his son, Lachlan, deemed Disney’s enhanced offer as “superior” and postponed a shareholder vote for the deal originally scheduled for July 10.

Iger’s sweetener neatly addresses two issues: some Fox shareholders may prefer cash, while others may want the Magic Kingdom’s stock. The Murdochs are likely interested in the latter. They could owe sizable taxes – the family owns a 17 percent economic stake in Fox, most of it wrapped up in a trust. Also, Disney has only one class of stock, unlike Comcast’s two-class structure. The offer would leave Fox shareholders owning 19 percent of Disney. The Murdochs stand to be one of the biggest independent stakeholders after the deal.

Disney may have more room to up its bid than Comcast too. Assume the company borrows $35 billion to fund the cash portion. Throw in its current net debt and the $13.8 billion it will assume from Fox and its leverage reaches $75 billion. Its debt multiple – after factoring in Fox’s estimated EBITDA and cost savings from the deal – would rise to three times estimated 2018 EBITDA from its current 1.5 times. That still leaves it shy of Comcast, which is willing to lever up some four times.

In short, the rich mouse looks like it will win over the crazy Fox. But Comcast Chairman and Chief Executive Brian Roberts is not one to walk away empty handed. The cable giant is currently bidding $31 billion for Sky, throwing a wrench in the Murdochs’ plans to take full control. The European pay-TV provider would be a nice consolation prize for Roberts, and wouldn’t break his budget.


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