Disney/Fox: The Last Jedi


Over the course of a half century, Rupert Murdoch has parlayed his stake in a small Adelaide newspaper into one of the largest global media conglomerates, buying or founding his way into virtually every swathe of the media landscape. Now this most prolific of acquirers has decided to sell his life’s work – which is, to borrow a timely cinematic metaphor, an about-face as momentous as a Jedi knight switching sides.


Before Rupert Murdoch agreed to hand over 21st Century Fox to Disney, the opening gambit in his M&A strategy was Fox’s bid for Time Warner in July 2014. This bid was swiftly rebuffed by the board of Time Warner, primarily because the price offered was deemed insufficient. However the other, often unremarked, sticking point was Fox’s insistence on only issuing non-voting shares, so that voting control would remain firmly with the Murdoch family. Now, merely three and a half years later, the Murdochs have surrendered their controlling stake in Fox’s most prized assets, all without any premium for their voting rights, and without even an effort to secure management positions for James and Lachlan in the combined Disney/Fox entity. Sure, the Murdochs will continue to retain control of the “New” Fox, a ragtag collection of assets that would not have received regulatory approval for consolidation with Disney, but that represents only a small fraction of the value of the erstwhile Fox empire.


Further, not only have the Murdochs ceded control, but they have also ceded on price. Disney’s present bid for the assets of Fox imputes no premium to Fox’s standalone stock price, roughly $35 per share, which is also exactly where Fox’s shares were trading at in 2014. Clearly the Murdochs have not sought to argue that the value of their company has gone up over the three years. In fact, a deeper look at the numbers reveals that the price of 21st Century Fox has actually declined in terms of enterprise value, which has shrunk from $94bn in 2014 to only $75bn today. The fact that the enterprise value has gone down, while the stock price has remained flat, is explained by the massive stock repurchases that Fox has conducted – over $10bn in the last three years.


The M&A pivot at Fox is almost exactly echoed in the actions of Time Warner. After Time Warner rebuffed Fox’s overture in 2014, only two years later it speedily agreed to sell itself to AT&T. And like Fox, Time Warner experienced no appreciation in the value of its assets in that timeframe. In fact, Time Warner sold to AT&T for less than what it could have secured from Fox, if only Time Warner had been willing to negotiate back in 2014.


As John Maynard Keynes supposedly once said, “When the facts change, I change my mind. What do you do, sir?” Primetime ratings for the Fox family of cable and broadcast channels are down over 20 per cent in the quarter to date. The United States theatrical box office also seems to have inflected, with 2017 likely a down year despite a strong anticipated finish with Star Wars. And perhaps most emblematically, the market capitalization of Netflix has reached $85bn, eclipsing that of all media companies except for Disney.


Rupert Murdoch’s cashing-in of his chips is acknowledgement that the rules of the game have changed. 21st Century Fox ran the tables when conventional media companies controlled the distribution of their content and enjoyed operating margins of over twenty per cent. Now Netflix, Amazon and others are happy to do the same job for margins in the single digits. This is classic disruption, and it has only just begun. There will never be another owner-operator in media who has built by the bootstraps an empire spanning the full media spectrum, from newspapers to broadcast to satellite. In this way, Rupert Murdoch is perhaps the last of his kind, not quite a Jedi but surely the last mogul, in what is looking to be the final act of the US mass media industry.



July 2014:
21st Century Fox bids for Time Warner, with an implied enterprise value of $95bn. Enterprise value of 21st Century Fox at the time = $94bn.

August 2014:
21st Century Fox withdraws bid for Time Warner after being rebuffed.

October 2016:
Time Warner agrees to sell to AT&T, for an implied enterprise value of $105bn.

December 2017:
21st Century Fox agrees to sell the bulk of its assets to Disney, for an implied enterprise value of $75bn.