Is Disney's Big-Game Hunting Paying Off?

Acquisition of Maker Studios is Mouse House's latest high-profile purchase in the Iger era

Compared with the sizable acquisitions Disney CEO Bob Iger has made in the past, his $500 million-plus payout for Maker Studios last week seems downright thrifty. But the purchase not only moved Disney-watchers to question Maker’s value, it also had them asking whether the extended shopping spree that has defined the Iger era is the best strategy for a media conglomerate.

Since 2005, Disney has spent more than $18 billion on acquisitions, including Pixar ($7.4 billion), Marvel Entertainment ($4 billion) and Lucasfilm ($4 billion) — an amount far greater than any of its rivals.

Those additions have delivered north of $12 billion in shareholder value to date, according to Tuna Amobi, senior media and entertainment equity analyst S&P Capital IQ. “Under Bob Iger, Disney has been very, very disciplined about acquisitions,” he said.

But some analysts were baffled by the Maker takeover. Gabelli & Co.’s Brett Harriss said Disney is overpaying to play in the unproven world of multichannel networks (MCNs), most of which have failed to make money even from billions of eyeballs. “It’s a total head-scratcher,” he added. “Think about how many writers and producers you could buy with a billion dollars.”

Several of Iger’s other digital acquisitions have done little to boost the bottom line at Disney, most notably social-game firm Playdom (for which it paid $563 million) and Club Penguin ($350 million). “The overall track record of new-media company integrations by big-media buyers is pretty poor,” Cowen & Co. analyst Doug Creutz observed, citing MySpace, which News Corp. bought in 2005 for $580 million and sold six years later for $35 million. “We are not convinced Maker will be able to maintain its success now that it is part of a large bureaucratic organization.”

Perhaps to allay concerns, Disney for now plans to keep Maker as a standalone unit, with Ynon Kreiz, the multichannel network’s exec chairman and CEO, reporting to Disney chief financial officer Jay Rasulo, instead of to the struggling Disney Interactive unit where some of the previous disappointing acquisitions currently sit.

But can Maker, which has yet to be profitable, do any better? Disney intends to use the firm’s 5.5 billion monthly views as way to promote and distribute the Mouse House’s own projects, and incubate new content and talent through the MCN for potential TV shows or movies. “With our younger, millennial audience growing on YouTube — and Maker is the obvious leader (in the multichannel space) — that will create a lot of value,” said Kevin Mayer, Disney’s exec VP of corporate strategy and business development.

Amobi conceded the move is risky, adding he was surprised at the size of the deal — $500 million up front, plus up to $450 million more if the MCN hits performance targets. But, he added, “All it would take is to launch a billion-dollar franchise through Maker and it would pay for itself.”

Other traditional entertainment firms, including Warner Bros. and Chernin Group, have taken a much more cautious approach to the MCN space by making investments instead of going all-in like Disney. “Time Warner put $25 million in Maker,” Harriss noted. “That seems the scale at which you’d want to invest in these unproven models.”

Also last week, Collective Digital Studio, an MCN with franchises that include “Video Game High School” and “The Annoying Orange,” said that German broadcasting giant ProSiebenSat.1 had taken a 20% stake in the company with an eight-figure investment, according to Michael Green, chairman of CDS.

Said Peter Csathy, CEO of Manatt Digital Media Ventures: “(MCNs are) now top-of-mind for all the major studios. There will certainly be a flurry of M&A activity in the next 12-18 months.”

Fullscreen, a major MCN like Maker, with investors that include Chernin Group, Comcast Ventures and global ad agency WPP, is not publicly entertaining major studio suitors, according to CEO George Strompolos. However, he said, the MCN does see value in combining with a large, well-heeled player like Disney — and the two companies will certainly be involved in projects together, even without fiduciary ties.

“There is something to be said for ‘upstreaming’ the best creators, the best intellectual property into more of the avenues that traditional media (offers),” Strompolos said, in an interview prior to Disney announcing the Maker acquisition. “We see a lot of promise there in years to come.”

It’s worth noting that the Maker deal, while not pocket change, is not a bet-the-farm accord. Disney generated $45 billion in revenue for fiscal 2013, and had $4.4 billion in cash and equivalents at the end of 2013. And, given Maker’s scale and relatively low fixed costs, the  purchase is unlikely to be a significant drag on Disney’s free cash flow.

But Daniel Leff, managing director of Luminari Capital, a small fund focused on digital video investments, believes acquisitions can’t be measured just by dollars in the brave new world Maker represents. “Large media companies have not participated in this form of content creation and distribution heretofore,” Leff said. “Disney needs access to that innovation.”

Susanne Ault contributed to this report.

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