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Jubak's Journal
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Who wins, who loses if Comcast wins Disney
The ramifications of a done deal would be profound for the cable, entertainment and telephone industries -- and for the health of the financial markets.
By Jim Jubak
It will take some time to sort out all the details surrounding Comcasts (CMCSA, news, msgs) surprise $54 billion bid for the Walt Disney Co. (DIS, news, msgs), but one thing is already pretty clear: A deal this big shakes up all of the cable, entertainment and telephone industries.
Even if it takes a year to complete, the attempted takeover alone changes the way that investors think about companies in these sectors. And the change of thinking will force stock prices to adjust -- up AND down.
So who are the winners and losers in Comcasts bid for Disney?
The probable winners
Walt Disney Co. Analysts have argued for months that Disney shares are undervalued. Whatever the at best mixed performance of current CEO Michael Eisner, assets that include the film and animation studios, the ABC-TV network, the ESPN cable sports empire and the theme parks are worth somewhere near $30 a share. The lowball offer from Comcast has certainly convinced Wall Street about that.
The stock popped 15% to $28 a share in the hours after the hostile bid was announced. In the short run, Wall Street analysts think, Comcast might have to go to $31 a share to get the deal done. In the long run, Comcast could provide Disney with a huge new distribution channel for its content. Comcasts cable systems pass by nearly 40 million homes and the company has 27 million subscribers.
Comcast. In the short term, Comcasts bid will take a bite out of the companys share price as Wall Street worries about when the company will have to raise its bid for Disney and how disruptive integrating another huge acquisition might be. (Comcast acquired AT&Ts cable business in 2002.) In the long term, though, getting the deal done will make Comcast a winner, especially if it can buy Disney for $31 a share.
Recognizing the value of the intersection of content and delivery streams, Comcast has aggressively pushed video on demand through its cable systems. Owning the content, rather than just licensing it, would give Comcast the ability to create new proprietary content that would be a powerful selling tool. And Comcast wouldnt be looking at that nasty 10% annual increase over the next five years in the fees it owed Disneys ESPN. That alone, calculates Deutsche Bank, could be worth $10 billion in deal value.
Get all the latest Disney news at MSN Money
Time Warner and News Corp. Comcasts bid to combine a broadband distribution network with content ownership is modeled after the structure of two big competitors:
- Time Warner (TWX, news, msgs), which owns the No. 2 cable company, the WB-TV network and such content as Warner Bros. movies and HBO TV shows.
- News Corp. (NWS, news, msgs), which owns the Fox broadcast and cable networks, 34% of Hughes Electronics (HS, news, msgs) satellite DirecTV unit and the Twentieth Century Fox movie studio.
The market may well revalue Time Warner and News Corp. in the light of this deal: If the potential combination of Comcast/Disney is so attractive, shouldnt investors pay a premium for shares of companies that have already put the pieces together?
EchoStar Communications. The potential Comcast/Disney combination puts the heat on other content companies to acquire broadband distribution networks. And there arent a whole lot of acquisition candidates out there with national reach. EchoStars (DISH, news, msgs) eight direct broadcast satellites provide the capacity to deliver 500 broadband channels to any consumer who orders a dish. The stock climbed 4% on Wednesday on the news of Comcasts bid for Disney.
Scientific-Atlanta and Harmonic. A Comcast-Disney combination would increase Comcasts already intense commitment to video on demand and accelerate the companys rollout of those services. (Why acquire content if you cant push it down your network?) That would be good news for companies such as Scientific-Atlanta (SFA, news, msgs) that sell the enhanced TV set-top hardware that video on demand requires. Its also a plus for Harmonic (HLIT, news, msgs), a leading supplier of broadband gateways in Comcasts video on demand build out. Obviously, neither of these companies is booking increased revenue from this business now.
The probable losers
SBC Communications, Verizon, BellSouth and pretty much the entire telephone industry. Look at it this way: The cable companies were already charging hard to take away the phone companies customers by offering cheaper phone service over cable lines. The telephone companies were fighting back by launching their own broadband delivery systems. But none of the phone companies owns any content, and that puts them all at a serious disadvantage against their more integrated competitors.
True, SBC Communications (SBC, news, msgs) has a video wholesale arrangement with EchoStar, which gives the company some benefit from EchoStars distribution network. . . .
Continued on Page 2
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Comcast, Lamar Advertising, and Time Warner. He does not own short positions in any stock mentioned in this column.
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