Disney is Acquiring 21st Century Fox!
There has been some interesting development in the entertainment world! One of the biggest entertainment giant, Disney, is buying over the iconic 21st Century Fox!
Many of you have asked me about my view on the deal and asked whether is there any investing opportunity in this situation. Before I go on, I want to emphasize that this is just an academic discussion, not a recommendation or advice of any sort!
Let’s do a quick run through what actually is going on.
What happened?
In short, Disney (DIS) is buying over most part of 21st Century Fox (FOXA). Which are the parts? See below!
Overall, the deal is priced at roughly $52.4bn.
Now, before you start shouting “Expensive!”
Let’s see how Disney is going to pay for it. Not by cash, but by issuing more shares.
This means Disney will pay for the deal by issuing new DIS shares of its own company to the current FOXA shareholders. Below is an excerpt from the announcement slide by Disney.
In summary, Disney is issuing 515 million new DIS shares to the FOXA shareholders to buy the most of the FOXA’s business.
What does this mean?
For every 1 share of FOXA, the current shareholder will receive 0.2745 new DIS shares.
In addition to that, each FOXA share will also receive 1 share of the leftover company (FOXB) that contains the rest of the unsold business.
Therefore, the new valuation of each FOXA share would roughly be 0.2745 of the value of a DIS share + the value of a FOXB share.
With the last average price of DIS share at $102, this means they are giving each FOXA shareholder about $28 worth of DIS share.
Since, the price of each FOXA share, as of 16 Dec 2017, is $35. This means the deal is effectively valuing each FOXB share at about $7 ($35-$28).
What can I do?
Well, there are a few scenarios here.
If you are holding DIS shares
You won’t be receiving any new shares. In fact, your shares will be diluted in terms of percentage of the company (~25% diluted).
But if the earnings of the newly mergered business can out-perform the share dilution (more than 25% increase in earnings), it is still a good deal. In this case, the acquisition of FOXA will be called accretive, as it actually benefits you as a shareholder.
However, that remains to be seen. While all mergers are carried out with high expectations, not all mergers turn out to be positives.
If you are holding FOXA shares
You will be receiving two types of new shares, DIS shares and FOXB shares. While the DIS share price is more or less $100 and you are receiving 0.2745 DIS share for each FOXA share, the value of the FOXB shares is more uncertain as it depends on how much the remaining business is valued at. Furthermore, the deal also depends on the future price of DIS shares when the deal is finally settled in 12-18 months.
Essentially:
If FOXA share price goes down but DIS share price goes up, you will get an even better deal than now.
If FOXA share price goes up but DIS share price goes down, you will be disadvantaged.
If the deal does not go through.
I suspect both companies’ share price will fall in tandem as the market tends to overreact to bad news. In that case, it won’t matter much if you are holding DIS or FOXA shares.
If you are not holding on to any stock.
However, if you are not holding on to any stock but interested to invest in this deal, there seems to be an interesting strategy available
If you are positive of Disney as a business and has always wanted to invest in Disney, you can purchase the FOXA shares as a way to obtain DIS shares.
Since we know that each FOXA share will be given 0.2745 DIS share, you can effectively buy four FOXA shares to exchange for one DIS share, instead of buying DIS shares directly. In addition, you will be allocated FOXB shares at the same time.
This strategy, in my opinion, is especially positive when the price of four FOXA shares is the same or less than one DIS share. As this would mean that, you are receiving FOXB shares almost for free.
Now, which scenarios are you in? What do you intend to do? Do share so that we can discuss in greater details!
See you soon!
Investing Always,
Pete
