(Bloomberg) -- This week we learned that America’s two biggest legacy media companies, Walt Disney Co. and Comcast Corp., may battle for control of some $50 billion worth of 21st Century Fox Inc. assets. So, what are the two of them fighting over anyway?
It just so happens that Fox reported its earnings for the third quarter after the close of trading Wednesday. The results are a timely reminder of what makes its TV and film assets so appealing to Disney and Comcast—so much so that to get a deal done, one of them is willing to dilute its shares, while the other may be willing to go deep into debt.
Fox’s cable networks include the various Fox News and national Fox Sports brands that the Murdochs are planning to keep. Then there are FX Networks, National Geographic, Star India and regional sports networks, all of which are among the assets they’ve agreed to sell to Disney. Fox’s cable-networks division generated a 10 percent increase in revenue and a 16 percent increase in operating income before depreciation and amortization (Oibda) as the company benefited from a series of renewed carriage agreements.
This shows the value of Fox’s array of content in negotiations with cable- and satellite-TV providers, even as those companies grapple with the trend of customers flocking to cheaper online streaming services. Affiliate fees, as they’re called, also make up a larger proportion of Fox’s revenue than advertising, which is now on a downward trajectory for the U.S. TV industry overall.
The volatile film unit at Fox dragged down results, with Oibda falling 23 percent. But this, too, presents an opportunity for Disney and Comcast. Disney CEO Bob Iger has built a reputation for picking great film-studio acquisitions—Pixar, Marvel, Lucasfilm—and he may see a way a turn around Fox’s. Aside from that, at the root of any Fox deal is its library of content, characters and story lines. For Disney and Comcast, which owns NBCUniversal, that library can yield numerous opportunities for future movies, consumer products, theme-park rides, etc.
Good TV and film businesses that can move the needle for Disney or Comcast don’t come up for grabs often. Almost all of them are controlled by a few stubborn billionaires, and the regulatory environment hasn’t typically been friendly to megamergers between rivals in an already fairly concentrated industry. Rupert Murdoch’s sudden willingness to part with a chunk of Fox’s assets says a lot about where one of the most prominent media moguls sees the industry heading, while the pursuit of Fox also reveals how Murdoch’s counterparts at Comcast and Disney view the regulatory environment under Donald Trump. It’s becoming an “anything goes” world for media deals, as I wrote earlier this week.
To Disney and Comcast, scale is the name of the game. Amid a messy assortment of low-margin streaming services and a decline in TV advertising, they think they can win by getting their hands on as many popular franchises as possible. Investors are still gleefully throwing money at Netflix Inc., and the streaming giant continues to get larger and leave shares of legacy media companies in the dust. Netflix’s market value now exceeds Comcast’s and is barely lower than Disney’s.
Fox offers its suitors a content library that they can monetize for their own distribution services or charge more for to competitors. Whichever company buys Fox will also get control of Hulu, the underdog to Netflix, whose current ownership structure has been seen as a hindrance to the business. There’s also Sky Plc, of course, the British broadcaster and pay-TV provider that Disney was planning to inherit from the Fox deal. Comcast has made a run at Sky, too, which you can read all about here and here.
It’s unclear whether Iger and Comcast CEO Brian Roberts are right that greater scale by way of a risky merger is the solution to cord-cutting and younger consumers’ aversion to ads that interrupt their programs. In fact, megadeals tend to be more trouble than they’re worth. But Iger and Roberts are no dummies, and they clearly see something special in Fox. Wednesday’s earnings likely did nothing to cloud their perception.
©2018 Bloomberg L.P.