Pact makes Disney more competitive with congloms

By snagging Fox Family Worldwide, the Mouse House has effectively edged out one of its international kidvid competitors while laying the groundwork to compete more aggressively with integrated congloms like Viacom and AOL Time Warner.

In return for $3 billion in cash plus the assumption of $2.3 billion in debt, Disney will get the Fox Family Channel, the Saban Entertainment library, 76% of Fox Kids Europe and Fox Kids Latin America.

Mouse chairman-CEO Michael Eisner calls the acquisition — Disney’s biggest since the ABC buy — “a deal we had been fantasizing about for maybe three years.”

The same could be said for the net’s former 50-50 owners, Rupert Murdoch’s News Corp. and Haim Saban, who were frustrated by Fox Family’s weak ratings.

For its part, News Corp. untangles itself from the sticky situation of having to buy out partner Saban, who gets very rich with a $1.6 billion payday. News Corp. gets an infusion of funds to put toward a highly coveted purchase of satcaster DirecTV.

But, since the deal was unveiled July 23, the gambit hasn’t helped Disney’s languishing stock price, despite generally favorable reaction to the proposed acquisition from analysts.

“Fox Family instantly gives Disney a fully distributable cable network that appeals to a broad demographic base,” says Sutro analyst David Miller. “Up until now, Disney has had only the Disney Channel, which is niche-oriented, some stakes in other niche cable networks and ESPN — which is niche sports and mostly male-oriented at that.”

As for whether the acquisition ultimately will goose the Mouse House’s stubborn stock price, Miller suggests, “It depends on your time horizon.”

Disney is presently “stuck in the mud” near a 52-week low of $26.15 set July 24, he notes.

Indeed, Disney’s chief financial officer Tom Staggs calls the Fox Family assets “diamonds in the rough” and sees the Mouse House doubling Fox Family’s annual operating cash flow to $300 million by 2003. He says the international operations hold particularly good prospects for boosting subscriber growth — which should translate well to the Disney bottom line.

Fox Kids Europe reaches more than 24 million subscribers and Fox Kids channels in Latin America have 10 million subscribers.

“The acquisition will provide us with a vehicle for further distributing our programming and brands internationally on basic cable,” says Robert Iger, Disney’s president and chief operating officer. The international channels will report to the ABC Cable Nets Group, which also oversees the international Disney Channels, and will likely be re-branded with the Disney moniker.

Asked if Disney planned to follow the Fox Family buy with further acquisitions, Eisner told analysts the Mouse House remains on an acquisitive tract.

As soon as the deal gets antitrust approvals in the U.S. and abroad, Disney plans to inject fresh life into Fox Family and get more bang for its entertainment buck by drawing, in part, on rebroadcasts of Mouse properties such as ABC primetime shows, news and sports. Fully distributed cable nets are rare assets, and with 81 million subscribers, Fox Family holds enormous potential.

Renamed ABC Family, net will be headed by Maureen Smith, president of Fox Family and Fox Kids Network. Channel will rely heavily on repurposed content from Disney properties, including ABC, ESPN and Disney Channel, as well as Disney-owned magazines Family Fun and Discover.

Deal will give ABC the opportunity to amortize the costs of original programming — a common goal in this age of fragmented audiences and skyrocketing programming costs. NBC, for instance, re-airs several news programs on its cable nets CNBC and MSNBC.

ABC multicasts its daytime soaps on its cabler SoapNet and broadcasts “Once and Again” on Lifetime — in which Disney owns a 50% stake –days after it airs on ABC.

Through its most recent deal with its affiliates, ABC has the right to repurpose 25% of its primetime entertainment programming within a week of its original broadcast. In addition, ABC can pepper the sked of the new net with rebroadcasts of its news, sports and daytime programming, as well as movies and specials.

“This deal is the beginning of a new trend in the American broadcast and cable environment,” Eisner says. “This acquisition means that we can still make expensive Hollywood film and entertainment content.”

Repurposing programming may be cost-effective, but it tends to irk affiliates. ABC held a conference call with its affiliate board last week to discuss the acquisition and it’s likely that at some point, they’ll suggest the possibility that the 25% repurposing cap could be increased.

“Paying for material once and using it multiple times is happening all over the place,” says Freedom Broadcast president Alan Bell and ABC affiliate. “We all see the merit of it. The question is whether you can achieve the economic efficiency of it without hurting anybody.”

ABC’s pact with its affiliates expires in one year.

Other industry insiders wonder how Disney will manage to create a recognizable brand out of ABC Family when it will air news, sports, kids’ programming and sitcoms.

The old Fox Family had a hard enough time targeting an audience and a mix of “Power Rangers” and “Nightline” rebroadcasts could confound viewers.

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