A complicated transaction means investors may not yet appreciate its value
There’s a lot more to Disney’s proposed purchase of Fox’s entertainment assets than meets the eye.
For a guide to what it really means for investors, I recently checked in with Robert Routh, who covers the media sector for FBN Securities.
I’ve known Routh for over a decade, and during that time he has put several great media-sector calls in my columns — like Playboy ahead of its buyout; and Madison Square GardenMSG, +1.55% on its initial public offering in 2010. Both were extremely profitable trades. Routh also predicted many of the terms in Walt Disney Co.’s DIS, -0.22% deal with 21st Century Fox FOXA, +0.57% FOX, +0.82% in a note published just ahead of the transaction announcement.
Here are three key takeaways for investors, in the proposed Disney-Fox deal.
Takeaway No. 1: Disney suddenly looks cheap
I’ve been suggesting shares of Disney under $101 in my stock newsletter, Brush Up on Stocks, on the theory that worries about the impact of cord cutting on ESPN were overblown because, sooner or later, Disney would figure out how to navigate the new world of content delivery. Besides, it has lots of content, so it has a strong hand in this game.
Now, buying the entertainment businesses of 21st Century Fox looks like a master stroke for Disney for three reasons.
1. It’s a sign Disney is finally getting its act together in the new world of online content delivery. That’s because the deal will give Disney 60% ownership of Hulu, a video content delivery platform. This puts Disney fully in charge. So it can strategically develop Hulu to knock heads with Netflix NFLX, +0.25%
Hulu hasn’t significantly challenged Netflix so far because there were “too many cooks in the kitchen,” says Routh. Besides Disney and 21st Century Fox, NBCUniversal owner ComcastCMCSA, -0.43% and Time Warner TWX, -0.51% all own a piece of Hulu. But no single owner had control. “So they all had different ideas about where to go with Hulu,” says Routh.
Assuming the Fox deal goes through, Disney can take command and bulk up Hulu to confront Netflix.