Whether or not Disney winds up with the 21st Century Fox assets it agreed to acquire last December, the company’s pursuit is a net drag on the stock, according to an ominous new report by Pivotal Research’s Brian Wieser.
The Wall Street analyst issued a downgrade on the company’s shares, from “hold” to “sell.” In his report, Wieser explained that the “stock’s recent run-up fails to reflect that a higher price paid for Fox’s Entertainment assets would
reduce the value of Disney to its shareholders.”
If Comcast’s bid for Fox prevails over Disney’s, he added, “the absence of completion of the transaction would also be negative for Disney as it would mean the company would be unable to realize the synergies it expects to produce from the transaction. The strategic position of the company would further be weakened relative to what would otherwise be possible without the transaction.”
Wieser did not change his 12-month price target from $93 a share. Disney stock has slipped about 1.5% thus far today, to $107.20, but it has gained about 7% since the beginning of the month as investors salivate at the thought of an entertainment power getting even bigger.
“Certainly, we see industry consolidation (as marked by the ruling on AT&T-Time Warner) as positive for the industry relative to its absence,” Wieser wrote. “However, we also think that if Disney has to pay a higher price for the Fox Entertainment assets because it engages in a bidding war with Comcast, the Disney’s value would be negatively impacted as it would reduce the incremental value the company should be able to generate from synergies associated with the acquisition.
Disney management does have some tools in the toolbox, Wieser concedes. “It’s true that Disney could look for other ways to produce value, such as by applying higher levels of leverage to the company, dividing its video-centric businesses from theme parks or by pursuing other value-enhancing acquisitions, but any of these actions are theoretical at present.
“At a strategic level, we think Disney is fine without the Fox business. The industry is a ‘melting iceberg’ either way. However, we think that the company and its investors have bought into the idea that a direct-to-consumer orientation is a positive focus for the company. Disney can still prioritize direct-to-consumer initiatives without Fox, but its propositions to consumers and creators of content would be stronger with Fox but weaker without those businesses.”