Disney and Fox Seal Deal -- WSJ

12/15/17 02:47 AM EST

Pact is aimed at helping both companies fend off threat from digital giants like Netflix

By Ben Fritz, Amol Sharma and Sarah Rabil 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 15, 2017).

21st Century Fox Executive Chairman Rupert Murdoch invited Walt Disney Co. Chief Executive Robert Iger to his winery in Los Angeles last month as the executives were trying to nail down a deal that would mark a turning point in both of their careers.

After a lunch of chicken and salad, the executives opened a bottle of Chardonnay and walked through the vineyard to hash out terms under which Disney would buy Fox assets, people familiar with the discussions said. A few weeks later, as the talks reached the final stretch, the same property was threatened by a 422-acre brush fire that swept through the upscale Bel Air neighborhood.

The winery survived, and so did the deal.

Disney said Thursday it agreed to buy most of 21st Century Fox Inc. for $52.4 billion in stock, in a deal that would give Disney a dominant position in movies and sports and help bolster its flagging television business as it prepares to directly challenge digital giants like Netflix Inc.

Disney is buying the Twentieth Century Fox television and film studios, cable networks including FX and National Geographic Channel, Star India, a 39% stake in Sky, 22 regional sports networks and majority control of streaming-video service Hulu.

Mr. Iger said on a conference call that the deal will give Disney new film- and TV-production capabilities, plus franchises including Fox's Avatar and the X-Men; expand Disney's comparatively weak international television presence; and advance his goal of building direct relationships with consumers online.

The deal will allow Disney to "create more content, serve consumers better on the domestic and international level and essentially grow our offerings to consumers in multiple ways," he said.

Disney also will assume about $13.7 billion of 21st Century Fox's debt, bringing the total value of the deal to $66.1 billion. The deal is expected to generate about $2 billion in synergies from cost-cutting.

The pact is the biggest in Disney's history and could be legacy-defining for Mr. Iger, whose success in his 12-year tenure has been based largely on building Disney around key brands he acquired, including Pixar, Marvel and Star Wars. Now he is betting the company's future depends on expanding beyond those franchises and delivering a broader set of content directly to consumers over the web.

The deal also marks the end of an era for 86-year-old billionaire Mr. Murdoch, who built the entertainment business over decades and who has long been considered a buyer and creator of assets around the globe.

The remaining Fox company that will be spun off as part of the deal will have assets including the Fox News and Fox Business cable news networks, the FS1 cable sports channel, the Big Ten Network and a television broadcasting business that consists of 28 local TV stations and the Fox broadcast network.

"We're pivoting back to our first love, which is news and sports -- things that happen in real time," Mr. Murdoch said in an interview Thursday. "We're proud that we make great movies and TV shows, but it takes a long time."

The deal talks began this summer during a casual meeting between Messrs. Iger and Murdoch to discuss the state of the media business and the disruptive impact of technology, the executives said. Mr. Iger followed up with a phone call to the Fox chairman a few weeks later and "posed the notion of taking this seriously and possibly considering the two of us merging," Mr. Iger said on CNBC Thursday.

Mr. Murdoch was open to hiving off entertainment assets. "We're conscious that the way people watch scripted entertainment has changed," he said in the interview. "It's harder to monetize. That's been happening as a result of technology and people's habits."

Though Mr. Murdoch has long been a buyer, there were no appealing options.An attempt to buy Time Warner Inc. in 2014 was unsuccessful. "Who would we acquire?" he said.

The initial Disney-Fox talks broke down in October, then restarted a few weeks later, with significant gaps remaining, including how Fox would be valued and how to handle regulatory and tax issues.

A breakthrough came on Nov. 19 at the meeting at the Moraga winery, people familiar with the discussions said. Disney's chief strategy officer, Kevin Mayer, was also present, as well as John Nallen, Fox's chief financial officer, a top lieutenant of Mr. Murdoch and key architect of the deal. During the winery visit, the executives resolved nearly all the major issues except price, one of the people said.

On Tuesday of this week, Messrs. Murdoch and Iger had lunch in London, by which time the deal was essentially done, the people said.

James Murdoch, Mr. Murdoch's son and Fox's chief executive, spoke to Mr. Iger on a regular basis throughout the process, the people said, adding that Mr. Iger has asked him to help plan the integration of the Fox assets. Mr. Iger said the men will continue to discuss whether there is a role for James Murdoch at Disney in the future.

Disney wasn't the only company to reach out to Fox about a deal. Verizon Communications Inc. did so in September, according people familiar with the discussions. Cable giant Comcast Corp. also pursued an acquisition of Fox assets. Mr. Murdoch said he opted for a deal with Disney largely because he felt it would be an easier sell in Washington and wouldn't require major structural concessions. "That was the deciding factor," he said. "We didn't want to go through that for a year and a half and have a crippled company handed back to us."

Mr. Iger said on the investor call that while he expects significant scrutiny from governments, he believes regulators "should quickly conclude the aim of this combination is to create more high-quality product for consumers around the world and to deliver it in more compelling, innovative ways."

Disney said it expects to receive all the needed approvals to close the deal in 12 to 18 months. If government regulators block the deal, Disney will have to pay Fox a termination fee of $2.5 billion, according to a Disney regulatory filing.

As part of the deal, Disney's board is extending Mr. Iger's contract past its previous expiration in July of 2019. He will now stay on as CEO through the end of 2021 if the deal closes,, Disney said, and is eligible for stock awards of up to $142 million at the current share price. His base salary and target bonus will also rise.

21st Century Fox shareholders will own 25% of Disney after the all-stock transaction, and the Murdochs have positioned the deal as a way for investors to benefit from Disney's giant content machine and bolstered efforts to deliver entertainment directly to consumers.

21st Century Fox shareholders also will retain their existing ownership of the spun-off Fox, which will have about $9 billion in debt and $10 billion in annual revenue.

Some analysts are predicting the leaner Fox could pursue its own acquisitions.

In 2013, the Murdoch family split its media empire, putting entertainment assets in 21st Century Fox and publishing assets, including The Wall Street Journal and newspapers in the U.K. and Australia, in a new News Corp. Mr. Murdoch has contemplated reuniting News Corp with the new Fox but it is unlikely in the near term given complexities including how to manage the potential tax bill, people familiar with the matter said.

The breakup of 21st Century Fox comes with trade-offs. The new Fox will primarily draw revenue from fees paid by TV distributors and advertising sales, leaving it more exposed to the shifting television landscape where cord-cutting and new streaming competitors have reduced ratings and pay-TV subscribers.

Also, the Fox broadcast network will be severed from the Twentieth Century Fox television studio, which produces most of its shows. "We can make our own programs," the elder Mr. Murdoch said on a conference call. Fox will still buy from Twentieth Century Fox Television, and independent studios such as Warner Bros. and Sony "will be looking to us to buy programs," he said.

The Fox network has been struggling for years. Sports rights help Fox command significant carriage fees from pay-TV distributors and its own affiliates, but if its entertainment ratings sink further, maintaining that leverage could be a challenge.

The leadership and management structure of the new Fox is still being figured out, Lachlan Murdoch, currently executive co-chairman of 21st Century Fox alongside his father, said on the call. A person familiar with the situation said Lachlan is likely to become the CEO.

--Joe Flint contributed to this article.

Write to Ben Fritz at ben.fritz@wsj.com, Amol Sharma at amol.sharma@wsj.com and Sarah Rabil at Sarah.Rabil@wsj.com


(END) Dow Jones Newswires

December 15, 2017 02:47 ET (07:47 GMT)

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