Disney’s Marvel-Like Lucasfilm Deal Sees Many Avengers
Walt Disney Co. (DIS), which agreed to its biggest takeover in almost seven years, is betting $4.05 billion that “Star Wars” is more valuable with Iron Man and Thor than it was under George Lucas’s control.
The announced price for Lucasfilm Ltd. is larger than every Disney purchase since Pixar in 2006, according to data compiled by Bloomberg. If the new “Star Wars” trilogy starting in 2015 matches the films released between 1999 and 2005, Disney is adding the inflation-adjusted equivalent of three “Avengers,” its 2012 movie that won about $1.5 billion in ticket sales.
Disney can squeeze more value out of the 35-year-old movie series than any other entertainment company because of its consumer-products business, which delivered $3 billion of sales in 2011, and film-inspired amusement park rides, said Wunderlich Securities Inc. The chance to boost sales outside the U.S. makes the deal even more attractive for Disney shareholders than Marvel Entertainment Inc., the 2010 purchase that yielded “The Avengers,” the third-highest-grossing film of all time, Lazard Capital Markets LLC said.
“It will take some time to see the payoff here, but Disney’s not managing their stock price for tomorrow or the next day,” David Miller, a Los Angeles-based analyst at Caris & Co., said in a telephone interview. Though Disney shares retreated 1.9 percent following the deal’s announcement, “what the Street’s missing here is the supplier power that Disney now has. It makes sense strategically.”
Disney shares rebounded today, rising 1.3 percent to $49.78.
“This is a value-creating acquisition,” Jay Rasulo, the chief financial officer of Burbank, California-based Disney, said in an Oct. 30 phone interview.
“We fully expect that by joining forces with Disney, Lucasfilm will succeed in ways far beyond anything the company has ever experienced,” Lynne Hale, a spokeswoman for Lucasfilm, wrote in an e-mail. “Disney affords us endless new opportunities.”
Lucas, who is Lucasfilm’s only owner, will get half the purchase price in cash and the rest in Disney stock, according to an Oct. 30 statement, which also announced that a new “Star Wars” trilogy will start coming out in 2015. While Lucasfilm owns other assets such as the “Indiana Jones” movies, Disney said it valued the deal almost entirely based on “Star Wars.”
The transaction furthers Disney Chief Executive Officer Robert Iger’s pursuit of marquee content in an era marked by technology changes, such as $8-a-month video streaming and free game downloads, that disrupted Hollywood’s traditional revenue sources. Iger, who paid a combined $11.2 billion for Pixar and Marvel, said memorable characters will be valuable no matter what medium they appear in.
“Technology has proved more friend than foe to great storytelling,” Iger said in an Oct. 30 phone interview. “It allows us to distribute in ways we never thought would have been imaginable.”
If released today, the last three “Star Wars” films would have each generated $1.5 billion on average when adjusting for inflation, the expanded movie market outside the U.S. and increased popularity of 3-D releases, Disney said. Sales of related merchandise will total about $215 million this year, and Lucasfilm earned $550 million in operating profit in 2005, when the last movie, “Revenge of the Sith,” came out, Disney said in its statement.
Wunderlich’s Matthew Harrigan estimates that if Disney earns $800 million for each new “Star Wars” film and $250 million in the years one isn’t released, Lucasfilm’s value is $5.2 billion, or more than $1 billion greater than what Disney is paying. Should the next movie only match Lucasfilm’s profit in 2005 when “Revenge of the Sith” was released, the business is worth $3.5 billion, he wrote in a note to clients yesterday.
“The $5.2 billion number frankly could be low if they can do the magic,” Denver-based Harrigan said in a phone interview. “The $4 billion they’re paying is a pretty attractive price and a lot of the ‘Star Wars’ movies are going to be bigger than a lot of the Marvel movies.”
Evercore Partners Inc. says Lucasfilm’s peak earnings today would be $600 million to $700 million, including royalty and licensing profits. That implies Disney is paying 5.5 to 6 times earnings, which is a “reasonable multiple,” Evercore analyst Alan Gould said in a note to clients yesterday.
“It’s a pretty full price,” Brett Harriss, an analyst with Gabelli & Co. in Rye, New York, said in a phone interview. “But if they can go out there and put out a successful third trilogy of ‘Star Wars,’ you could see this deal making sense.”
Disney agreed to buy animation studio Pixar, which created “Toy Story” and “Finding Nemo,” in January 2006 and Marvel in August 2009. Lucasfilm is the biggest deal since Pixar, based on the size of the transactions when they were announced, data compiled by Bloomberg show. The Pixar purchase, initially valued at $5.8 billion, increased to $7 billion by closing, and Marvel expanded to $4.2 billion from $3.8 billion, the data show. The figures fluctuated because both deals included stock.
Iger is reinventing Disney’s film business through acquisitions of popular animated and live-action characters. “Marvel’s The Avengers,” the first film from that acquisition to be marketed by Disney, generated $1.51 billion in ticket sales, trailing only “Titanic” and “Avatar,” according to Box Office Mojo. The picture, Disney’s biggest ever, led to a 24 percent jump in profit in the quarter ended June 30. The purchase also added characters such as Iron Man and Thor to the company’s lineup.
Marvel and Pixar reinvigorated Disney’s film business, said Martin Pyykkonen, an analyst at Wedge Partners Corp.
“Some of the best movies they’ve put out are Pixar and Marvel, and more of the duds have come from their own home-grown studio,” he said in a phone interview.
Disney, with its merchandising business, theme parks and global presence, can revive and grow the “Star Wars” franchise more easily than Lucasfilm could on its own, said Wunderlich’s Harrigan.
Disney’s consumer-products division, which includes movie- branded apparel and toys for kids, drew $3.05 billion in revenue last year, while the company’s parks and resorts accounted for $11.8 billion, almost a third of total sales, data compiled by Bloomberg show. The top eight amusement parks worldwide by 2011 attendance belonged to Disney, according to an annual report from the Themed Entertainment Association and consulting firm Aecom.
“There’s no one else who could extract as much value from ‘Star Wars’ as Disney,” Harrigan said in a phone interview. “On the merchandising side, Disney feels they can do a much better job than Lucasfilm has done as a standalone.”
While parallels can be drawn between Lucasfilm and Marvel, the “Star Wars” owner “looks more promising” because of the opportunity to boost non-U.S. revenue, Barton Crockett, a New York-based analyst with Lazard Capital, wrote in a note to clients yesterday.
Each year, about a quarter of Disney’s sales are made outside the U.S. and Canada, data compiled by Bloomberg show. Lucasfilm has sold its products abroad via distribution deals with third-party agents, which can be cut out under Disney’s ownership, said Evercore’s Gould, who’s based in New York.
“There will be some cost savings by just taking out the middle man,” Gould said in a phone interview. “Disney is already in all those markets and licensing to the same retailers. It should be very little incremental expense for Disney to add the ‘Star Wars’ line.”
While Lucas will serve as a creative consultant for the new movies, Iger said in a conference call with analysts that “it’s his intent to retire.” Lucas, 68, said it was “time for me to pass ‘Star Wars’ on to a new generation of filmmakers,” according to the Oct. 30 statement from Disney.
Kathleen Kennedy, co-chairman of Lucasfilm with its founder, will become president of the unit. She co-founded Amblin Entertainment with director Steven Spielberg and produced “E.T.: The Extra-Terrestrial” and “Jurassic Park.”
The prospect that fresh creative talent will reinvigorate the franchise has fans excited, according to Paul Dergarabedian, president of Hollywood.com Box-Office. While the movies released in the late ’70s and early ’80s won acclaim, the second trilogy fared worse. When averaging the scores for each movie, 90 percent of reviewers liked the original trilogy, compared with 68 percent for the second batch of films, according to data compiled by RottenTomatoes.com.
The next movie, known as “Episode 7,” is scheduled to come out in 2015, the same year Iger is set to retire as CEO.
“There is a huge amount of hope and excitement surrounding ‘Episode 7,’ that it can kind of go back to what was created with the first three films,” Dergarabedian said in a phone interview. “Injecting new blood into the series with Lucas as the visionary could prove to be very, very fruitful and satisfying for the franchise.”