Rumours of 21st Century Fox Inc’s [FOXA:NSQ] decision to enter into negotiations with Disney [DIS:NYQ] to sell off its entertainment assets stunned the financial markets in very early 2018. By early May 2018 a $52bn all-share (or $66bn including assumed debt) deal to purchase the entertainment assets of Fox was put together by Disney. This would be taken to a vote on July 10th 2018.
Unexpectedly though, Comcast [CMCSA:NSQ] decided to “gatecrash” the deal and on 23rd of May 2018 news broke that they were in advanced talks regarding a rumoured rival $60bn all-cash offer to 21st Century Fox’s shareholders. On the 14th of June Comcast launched a formal $65bn takeover bid for the Fox assets. Comcast own NBCUniversal, and like Disney, could see considerable synergies of the Fox assets with its current media properties. The 10th of July vote was delayed until 27th of July as shareholders digested this news.
Below is an excerpt from the Financial Times Lex Column on 30th of May 2018 that gives an overview of the decisions facing the shareholders of 21st Century Fox:
It has already been a long week for Walt Disney. Between the racist antics of sometime TV star Roseanne Barr and the box office disappointment of Solo, its latest Star Wars instalment, good news has been in short supply. Rupert Murdoch’s 21st Century Fox is about to decide whether it wants to ride such high and lows at the House of Mouse. On Wednesday, Fox announced it would hold a shareholder vote on the proposed combination with Disney on July 10.
Lurking in the background is an expected but not-yet-disclosed bid for Fox’s assets from Comcast — whose entreaties Mr Murdoch has already rejected.
The ostensibly competing offers are tricky to compare. Comcast has lined up as much as $60bn in financing to support its all-cash bid for Fox’s entertainment assets. Disney’s all-stock offer is currently worth just over $50bn. The gap is misleading because Comcast is offering to cash out Fox shareholders by paying them upfront for transaction synergies.
With Disney, Fox shareholders get to share in any future prosperity. Yet this does not represent pure upside. The Mouse reported a good first quarter but its shares are already down a tenth in 2018 over worries about the viability of legacy media. Shares in rival Netflix are up 74 per cent this year. The streaming service’s market value of $150bn has zoomed past Disney’s even as its forecast 2018 revenue is just a quarter that of the Magic Kingdom.
Adding to the complexity is that activist investment fund TCI in late April 2018, on rumours of a possible rival Comcast bid, acquired a 4% stake in 21st Century Fox which it later increased to 7.4%. In late May the FT reported that Sir Christopher Hohn, the activist investor behind TCI, sent a letter to the board of 21st Century Fox urging them to not be swayed by the considerations of a single shareholder and reminding them of their fiduciary duties to get the best deal possible for all shareholders:
“We are aware that the Murdoch family has a potential conflict of interest because of capital gains tax, which could lead them to preferring a lower priced Disney stock offer, to a higher priced offer from Comcast. However, the personal tax position of the Murdoch family must be an irrelevant consideration for the board, in order for the board to comply with their fiduciary duties. It is imperative that the 21st Century Fox board runs a fair auction . . . and sells it to the highest bidder”
In an academic essay format, you are to consider the competing bids between Disney and Comcast to acquire the assets of 21st Century Fox. Financial Times news articles regarding the acquisition can be found below to support students:
You are expected to use this articles and your access to FT resources as the starting point in your wider investigation and research into the deal. You should be using further resources beyond this initial starting point.
Specifically, you are to choose two of the following three tasks and write a single academic essay that addresses both of the tasks selected (50 marks).
- You are required to critically evaluate the academic literature regarding the success or failure of merger and acquisition activity and conclude with an informed judgement as to whether the evidence from the literature would suggest that shareholders of 21st Century Fox should welcome or be wary of the two competing bids for their company. You are in your conclusion to come to a specific recommendation of how you would advise a shareholder to vote in the 27th of July 2018 shareholder meeting. Your answer should only use information that was available up until the date of the July 27th vote.
- You are required to come to a judgement regarding the ability of managers to judge the value of another company when engaging in acquisition activity. Your answer should specifically show an engagement with the academic literature regarding both the efficiency of the stock market and share valuation. Your answer should include an evaluation of the decision of either Disney or Comcast to value their bids at the respective amounts, specifically discussing the difficulties in placing asset price values on the creative assets that they are attempting to purchase. Your answer should conclude with a judgement of the risks involved for either Disney or Comcast in accurately pricing these assets in this fast-moving entertainment based industry.
- You are required to critically discuss the impact of cost of capital & capital structure on the ability of companies to generate acceptable returns for shareholders. Your answer should display a thorough and extensive engagement with appropriate academic literature and come to an informed judgement regarding the overall impact of capital structure on the ability to generate wealth. Your answer should specifically examine the impacts on either Disney or Comcast’s shareholders of the structure and value of their respective companies (and shares). In your answer you should assume that Disney’s offer is an all share offer financed solely through issuing new shares, and Comcast’s cash offer is financed through entirely new debt issuance. You come to a conclusion as to impact of a possible post-deal cost of capital & capital structure upon the ability of either Disney or Comcast to generate acceptable returns for shareholders.