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Once again, Rupert Murdoch has proved he is a king of value creation, cutting a deal on December 14 where the Walt Disney Co. will buy some of the crown jewels of the media industry from 21st Century Fox Inc. for $52.4 billion in stock, plus the assumption of about $13.7 billion in debt for a total transaction value of $66.1 billion.
The transaction works out to a sweet deal for 21st Century Fox shareholders, who will note that the deal value is higher as the reported transaction value includes a price per share representative of the 30-day moving average of $102.00 per share for Disney's stock. Disney shares closed on December 13 at $107.61 and then closed at $110.57 on December 14.
Even using the lower price, for 21st Century Fox shareholders, the transaction is valued at 11.9x estimated 2018 cash flow. On a conference call for the deal, Murdoch was asked why Fox was divesting its regional sports networks in light of the fact that the slimmer 21st Century Fox will be focused on news and sports. He replied that the company would have had a much bigger tax liability if it held onto the channels and also that it was getting a hefty 12.5x multiple for the Fox Sports Networks.
The deal has a complicated tax structure, according to comments by management on conference calls, as well as a report from Wells Fargo Securities. Disney will pay $8.5 billion in estimated taxes, which will then be repaid from 21st Century Fox via a special cash dividend.
The exchange ratio will be adjusted just prior to closing based on an updated estimate of what the actual tax liability will be. If the estimate is lower, the first $2 billion of the adjustment will be made by a reduction of the dividend payable to Disney.
Fox shareholders will then benefit from a step-up in the tax basis of assets, and roughly $1.5 billion of each year's taxable income will be sheltered for 15 years.
Disney shareholders are getting a good deal as well. When $2 billion of expected synergies are factored in, the buyer's multiple drops to just 8.3x 2018 cash flow.
As part of the deal, Bob Iger has agreed to continue as chairman and CEO of Walt Disney Co. through the end of calendar year 2021. This will enable the combined company time to digest all of the assets, reap an expected $2 billion in cost savings, and perhaps groom James Murdoch for the role if he decides to come over to Disney; they are still in discussions about this. James Murdoch currently serves as CEO and a director of 21st Century Fox.
The contract extension may have dashed Iger's hopes for a run against President Donald Trump. Iger had reportedly been considering running for president in 2020, but there is always 2024.
The deal comes more than 32 years after the March 18, 1985, announcement that Capital Cities was buying ABC and its cable networks ESPN, Lifetime Television and A&E – which were all losing money at the time – for $3.5 billion. These were later folded into Walt Disney Co. when a deal was announced a decade later on July 31, 1995.
At the time, we wrote in the Kagan publication Media Mergers & Acquisitions that "the most surprising thing about Disney's July 31 deal to acquire Capital Cities/ABC is that it took so long ... When control of the TV networks changed hands in 1985 – ABC to CapCities, CBS to Loew's and NBC to General Electric – it was inevitable that they would change hands again."
That was due to the fact that CapCities' management did not own control of its shares, and neither Loew's nor GE fit the profile of a network owner. Like the current transaction, that deal was all cash and assumption of a significant amount of debt ($19 billion). It also set off a frenzy of media M&A, with Westinghouse agreeing to buy CBS for $5.4 billion the very next day, and Time Warner Inc. offering to buy the 81% of Turner Broadcasting System Inc. it did not already own for nearly $12 billion months later.
Like the current Disney-Fox transaction, the Time Warner-Turner deal also included sports assets like the Atlanta Braves, the Atlanta Hawks and a piece of RSN FOX Sports South. And in October 1995, Liberty Media Corp. and News Corp. created a global sports alliance that effectively swapped 50% of Liberty's 14 RSNs, valued at $1.1 billion, for 50% of News Corp.'s f/X cable network and $350 million in cash.
That transaction also put a valuation on Star TV of $450 million. Flash forward 22 years later and that asset is worth about $10 billion today. Rupert Murdoch will go down in history as having built a great media empire, just rewards after many speculated his company, formerly News Corp., would go bankrupt in the 1980s following an expensive acquisition spree just prior to a recession that caused a significant downturn in revenues.