Disney chairman-CEO Bob Iger didn’t mince words Wednesday morning as he sized up his company’s chances of securing regulatory approval for the acquisition of major 21st Century Fox assets compared to rival bidder Comcast.
Iger cited Comcast’s sizable footprint as a broadband provider as a red flag for regulators during a half-hour conference call with Wall Street analysts held after Disney unveiled its sweetened offer for Fox. Disney’s bid for the 20th Century Fox studio, FX Networks, National Geographic Partners and other assets has ballooned, under pressure from Comcast’s aggressive bid, from $52.4 billion, as set in December, to $71.3 billion.
“We have a much better opportunity in terms of approval and the timing of that approval than Comcast does in this case,” Iger said. “We are confident that we have a clear and timely path to approval.”
Iger questioned Comcast’s reasoning in citing AT&T’s victory in the anti-trust trial over its acquisition of Time Warner as clearing a regulatory path for the cable giant to buy the Fox assets. He said the AT&T case didn’t deal with the broadband component that tends to be more heavily regulated than film and TV content and distribution assets.
“It’s simply an apples to oranges comparison to what the Justice Department was considering when considering the AT&T acquisition of Time Warner,” Iger said.
Iger noted that Disney is already six months into the regulatory review process and thus has a sense of the areas of concern for the Justice Department. He emphasized that Disney’s resolve to close the deal has only grown stronger after six months of studying Fox’s businesses and working with executives that Iger hopes to bring over to Disney.
“We have spent six months studying and engaging with the Fox businesses. We have a much greater appreciation for the potential that these assets represent to us, to our strategy today and to the strategy we intend to deploy long-term,” Iger said. “We’ve been extremely impressed with the talent we’ve been engaging with at Fox.”
Iger noted that the recent restructuring of Disney’s top management hierarchy — elevating Kevin Mayer to chairman of direct-to-consumer and international and Bob Chapek to head of consumer products, experiences and parks — was done “specifically with the idea of moving many of these [Fox] executives into key roles at the Walt Disney Company.”
Iger asserted that the “intrinsic value” of the Fox assets has increased markedly in the past six months thanks in part to federal tax reform legislation and operating improvements made by Fox. Disney is even more “enthusiastic” about the “strategic fit” of the 21st Century Fox units with Disney. The international assets including Fox’s interest in Sky, the Star India platform and Fox’s vast international channels group is particularly compelling, he said. The extra international reach will turn Disney into a “truly global entertainment company, significantly expanding our presence and distribution capabilities in overseas markets,” notably in Europe, Asia and Latin America, Iger said.
Christine McCarthy, Disney’s chief financial officer, said the cash component of Disney’s revised offer will raise the company’s leverage ratio to about four times annual earnings, if Fox is able to complete its long-pending $15 billion buyout of the Sky satellite platform (Comcast is also fielding a rival offer for Sky), or 3.4 times earnings if the Sky deal is not completed. That’s on the high side for media conglomerates but Disney has the balance sheet to easily absorb some temporary red ink. Disney is projecting about $2 billion in synergy savings by 2021, and it expects to get down to lower debt-to-earnings ration by 2021.
“We’re very comfortable with this level of leverage,” McCarthy said. “We’ve always said we would be willing to deploy our balance sheet to advance our strategic objectives.”
The rationale for the Fox acquisition has only grown strong in the six months since the initial transaction jolted Hollywood and set the stage of a fresh round of consolidation of media and content companies. Disney’s pursuit of Fox is all about bulking up its library and content creation pipelines in order to service new direct-to-consumer services that Disney hopes to roll out globally starting next year.
“Direct-to-consumer distribution has become an even more compelling proposition in the six months since we announced the deal,” Iger said. “Clearly the consumer is voting, loudly, that these new platforms are very compelling from a consumer experience and consumer value perspective.”