Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

Whoa, what's in the water lately?

Walt Disney Co. is said to have held talks to buy the majority of 21st Century Fox Inc. The negotiations are currently dead, but to give a sense of how big this partial acquisition could have been, Fox in its entirety has a market value of $50 billion. 

The size is probably less jarring than the initial shock of the thought of Disney and Fox getting together, given the deep-seated political and cultural differences between their news divisions that have been magnified since the latest U.S. presidential election. Turns out, though, Disney wasn't pursuing Fox News, the company's sports content or its broadcasting affiliates (Disney already owns ABC and ESPN).

The fact that their deal discussions were only for Fox's other entertainment content and movie studio makes the idea slightly more comprehensible. Plus, Fox News is Rupert Murdoch's (extremely profitable) baby.

A Whole New World
With both stocks down amid ratings pressure and cord-cutting, Disney considered a deal for most of 21st Century Fox, not including its lucrative Fox News division and sports content
Source: Bloomberg

This news follows speculation that bubbled up just months ago about Verizon Communications Inc. potentially making a play for Disney -- speculation, by the way, that Verizon's own CEO Lowell McAdam helped fan, which lent more credibility to it than just run-of-the-mill market chatter. Nothing came of it, and that probably has to do with the fact that Verizon couldn't afford Disney anyway, it being a $155 billion company. 

Even so, it just goes to show no merger is out of the question these days. Already powerful media companies are seeking more scale as Netflix Inc., Amazon.com Inc. and their ilk encroach on the traditional leaders' turf and as video-entertainment consumption increasingly moves to streaming apps and mobile devices.

In August, Disney announced it will stop selling movies to Netflix and launch its own online product next year to sell premiere content, such as films and ESPN programming, directly to consumers. Disney's cable network ratings fell 9 percent in the third quarter and double that the period before. 

Ratings for Fox's cable networks, such as FX and National Geographic, have also been slipping, but if it's scale Disney is after as it plunges into online services, then I suppose this would do it. Disney also has a clean balance sheet to make a large transaction like this possible. Its Ebitda from the past 12 months pretty much covers its net debt. 

Given that Disney CEO Bob Iger is set to retire in July 2019, I'm surprised that he would consider such a large takeover now. I've explained before that the more unwieldy Disney becomes, the more challenging it will be to find a successor that can manage Disney's studios, theme parks and consumer businesses on top of ratings-challenged TV networks and a new online-entertainment strategy. A breakup, to me at least, had seemed the more obvious route

As for Fox, it seems the younger Murdochs -- CEO James and his brother Lachlan, who now shares the chairman role with their 86-year-old father -- are looking to focus in on Fox's most profitable and prized businesses in response to the changing landscape that's left them with few remaining deal options. Time Warner Inc., which snubbed an offer from Fox three years ago, is now being acquired by AT&T Inc. (Sumner Redstone's CBS Corp. had also studied a merger with Time Warner a couple of years ago.) 

A Simpler Fox
21st Century Fox, which spun off its News Corp. publishing business in 2013, is said to have considered whittling itself down to just Fox News, sports and its local broadcasting affiliates
Source: Bloomberg

Even if these talks are done for now, add Fox to the list of companies that are very much in play. Its stock rose 10 percent Monday, so clearly shareholders are intrigued by the notion of it essentially breaking up or getting bought. CBS still hasn't found itself a target, and Fox's film studio might entice it. Fox's filmed entertainment division raked in $8.2 billion of revenue in the 12 months through June and earned about $1 billion of operating profit. The company is scheduled to report earnings Wednesday.

As I wrote earlier today, the wireless and cable-TV industries are on the verge of playing merger musical chairs, too. It could be that some of them look at media assets as well, piggybacking on AT&T's strategy. With so many personalities involved -- Iger, the Murdochs, the Redstones, Charlie Ergen, John Malone, etc. -- who wouldn't love to be a fly on the wall during those merger talks. There haven't been any formal bids yet, but something's brewing and Fox is clearly open to the idea.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net