E Here’s Why Apple Should Buy Disney

Disney is at a crossroads, having decided to pull its content from Netflix, increasing its investment in loss-making BAMTech, and planning to launch its own streaming business. On its own, this business is likely to be sub-scale, but combined with Apple’s customer base, it will be a potent endeavor.

Synergies

There would be the usual cost synergies with removing a redundant layer of high-level common functions in investor relations, finance and HR. However, the real attraction would be in how Disney’s businesses can be integrated into the Apple eco-system.

Disney’s main businesses and the potential synergies are as follows:

Media Networks: This business comprises the cable networks like ESPN and broadcast networks like ABC. The live programming and scripted shows could form the basis for a streaming TV service for Apple customers.

Parks and Resorts: This segment houses the theme parks and cruise ships. Integrating iOS into Disney’s existing technology would enable customers to use their iPhone or Apple Watch to book their place in a line, check into their hotel or cruise, book activities and pay for meals.

Studio Entertainment: Disney makes the best kid-friendly movies in the world. The film library can be used as a base to provide a streaming movie service while providing iPhone users sneak previews of upcoming releases.

Consumer Products & Interactive Media: Disney’s merchandising expertise could be used to customize iPhones, from a Star Wars theme for nerds to a Frozen princess for kids.

Financial impact

Unlike many of the momentum-driven unprofitable companies in today’s market, Disney is a profit machine and an acquisition would be accretive even without accounting for the synergies and strategic fit.

An acquisition for a 30% premium at $130 per share would mean an outlay of $200 billion.  This price would be higher than what Disney’s stock has ever traded at, and is highly likely to be acceptable to its shareholders. It could be funded with $100 billion of cash and the issuance of 650 million Apple shares, providing some measure of tax deferral for long-time Disney shareholders. With a modest amount of cost synergies (a few hundred million dollars a year), Disney would contribute $10 billion a year in annual profits before financing costs of $3 billion (assuming a 3% cost for the cash/debt). This would drive 3% earnings accretion for Apple before any revenue synergies. Please note that I am using 2017 earnings estimates for both companies because 2018 estimates look inflated at this point.

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Disclosure: Long AAPL, DIS, CMCSA

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Carl Schwartz 2 years ago Member's comment

Good acquisition target for $AAPL that I hadn't thought of. $DIS