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  1. Home
  2. / Investing
  3. / Technology

Disney-Fox Deal Likely Wouldn't Lead Either Media Giant to the Promised Land

Both Disney and Fox are trying to adapt to a changing media landscape, but any transaction likely won't cure all that ails them,
By DOUG KASS
Nov 07, 2017 | 11:00 AM EST
Stocks quotes in this article: DIS, FOX, KSS, JWN, TWTR, CBS, VIA.B, CMCSA, NFLX

The traditional media landscape, populated by Walt Disney Co. (DIS) , Twenty-First Century Fox (FOX) and others, has devolved over the last decade with a speed that many have underestimated.

Distribution content, omnipresent over the last 10 years, is now being replaced by content consolidation and the need for global channel scale and intellectual property.
 
While the possible merger with a large portion of Fox could be seen by some as a much-needed catalyst for Disney, the shares of which have languished in the face of relatively poor operating results and expanding competitive conditions, sizable challenges would remain.
 
The Disney announcement of a possible deal with Fox underscores the reduced core profitability of the media industry, which has evolved from a very profitable and proprietary model (hidden by a distribution capability) into a less-profitable, commodity-type business that has moved to and is focused on a more direct and cost-conscious consumer.
 
The timeline of a deal is not known, though it is believed to have been begun in November and to have been initiated by Fox, which likely leaked the story. According to David Faber, the companies aren't currently engaged in conversation. Whether the deal will be made at all, and which assets are to be sold, has yet to be announced, though, if revisited, it is believed to exclude Fox broadcasting, Fox's sports and news networks and affiliates.
 
Of a positive note, Disney has proven to be a good aggregator of properties via external growth/acquisition. and Fox's intellectual properties and production assets could produce a more diversified offering set for Disney, both geographically (outside of the U.S.) and otherwise (away from Marvel, Pixar, etc.).
 
The good news is also that if Fox's properties are acquired at about 12 times (at least historically a "cheap" price), Disney will earn about 8% compared to its cost of capital of approximately 4% to 5%.
 
Assuming that the price being speculated in the business news networks is generally correct, I don't see Disney as being materially enriched by this possible deal, as both companies are poorly positioned in new media and within the context of a more discerning consumer. Property values and returns seem destined to continue to deteriorate. Combining Disney and Fox provides some scale and cost-save opportunities, but little else. And given that it is unlikely that Murdoch's son, James (who had pursued a doubtful Sky deal) joins Disney, it doesn't even settle Disney's management (i.e,.CEO Bob Iger's) succession issues.
.
In the negative extreme (based on continued, more rapid decline in property values and ascending competition), the transaction could be very much like combining two department stores -- after all, would the merger of Kohl's ( KSS) and Nordstrom ( JWN) provide value? Probably not.
 
As to the impact on other media players, I don't see this as having a meaningful impact on Twitter ( TWTR) , which I still see as takeover fodder and I have been adding to; CBS Corp. ( CBS) , which may be considering a merger with either Fox or Viacom ( VIA.B) ; Comcast ( CMCSA) , Netflix ( NFLX) or any other media company if the merger actually happens.
 
My two-year Disney short has been most profitable (absolutely and relatively), having taken a large short on two separate occasions and having covered both positions at or near their trading lows.
 
Based on this information, while my Disney short mostly has been recently covered at lower prices ($95-$97) I would re-establish a more meaningful DIS short on strength above $105.
 
Given the broader market's ebullience and the popularity of Disney's shares and the desire of many to want a reason to buy after an extended period of underperformance, I would not be surprised that the stock is carried over $105 a share in the short term, especially on news of a revival of talks with Fox.

Disney was placed on my Best Ideas List as a short at about $116 in November, 2015, nearly two years ago.
 
Given the shifting and precarious fault lines in media, Disney will remain on my Best Ideas List.
 
* Disney's shares may trade higher over the near term and then lower over the intermediate term.

(This commentary originally appeared on Real Money Pro 8:30 a.m. ET on Nov. 7. Click here to learn about this dynamic market information service for active traders.) 

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the tine of publication, Kass was long TWTR.

TAGS: Investing | U.S. Equity | Technology | Consumer Discretionary | Entertainment | How-to | Mergers and Acquisitions | Risk Management | Stocks

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