Deal Logic

Twenty-First Century Fox / Walt Disney

WHU Finance Society

Contact: info@whufinancesociety.org Date: 15.02.2019

Website: www.whufinancesociety.org Authors: Simran Ajay, Johannes Fink, Philipp Hess

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 Authors’ Note
Abstract If 2018 was the year of mergers and acquisitions for companies in the A month later in July 2018, shareholders of both companies approved
media and entertainment (M&E) industry, 2019 will be the year media the acquisition offering of USD 71.3bn in cash and stock, which will
As a giant in the entertainment companies need to execute their strategies. The year ahead promises to include Fox's film and television studios, as well as partial ownership of
be a time of exciting change as new trends and technologies drive telecommunications company Sky TV, Indian media conglomerate Star,
space, you have the power to innovation, disruption, and opportunities for growth in media and and streaming service Hulu. Disney expects to pay a total of about
influence not only the kind of entertainment. USD 35.7bn in cash and issue approximately 343mn New Disney shares
content you roll out, but also the to 21st Century Fox stockholders. As a result, current 21st Century Fox
mediums on which the content can At USD 735bn, the U.S. industry represents a third of the global M&E will own a 17-20% stake in New Disney on a pro forma basis.
be offered. With the growing industry, and the U.S. industry is expected to reach more than USD
presence of online streaming 830bn by 2022. The Disney-Fox-Comcast bidding war ended with The impact of this acquisition will be seen on the operations and
Disney poised to acquire most of Fox’s assets and Comcast acquiring business of 21st Century Fox. With multiple shared services between
platforms, the need to make yourself Sky. Deals such as that of Disney-Fox-Comcast are a reaction to the Disney and 21st Century Fox, and the aim to downsize 21st Century Fox,
and your content relevant is ever evolution of media consumption away from the traditional linear model there will be layoffs, potentially numbering in the thousands. Fox will be
increasing. Under looming concerns and towards a more direct-to-consumer (DTC) model, necessitating a very different company after the deal is completed, though it will face
of a possible monopoly in the greater scale and more global platforms. less competition, removing it from concerns about the arms race in
entertainment sector, Disney's streaming and the decline of traditional cable programming. "New Fox"
In 2018, seven major studios control more than four-fifths of total film is expected to have annual revenue of USD 10bn and USD 2.8bn in
purchase of 21st Century Fox has
industry revenue, led by Disney (18.2%), NBCUniversal (16.4%), Time EBITDA, which, considering its valuation of USD 19bn with the
effects on the entertainment Warner (16.2%), 21st Century Fox (12.9%) and Sony (12.1%). An Disney assets removed, looks like a good value.
industry in the long run. With acquisition of 21st Century Fox by Disney would make Disney the
expectations of downsizing market leader with a consolidated share of 31.1%.
operations and possible large scale
lay-offs, the real-world implications In June 2018, Disney raised its USD 54.2bn bid to USD 71.3bn in order
to drive Comcast out from the bidding war. Both Disney and Comcast
of the buyout aren't exactly light-
saw the acquisition of 21st Century Fox as potentially transformative,
hearted fun. adding to their arsenal of hit movies and shows at a time when digital
behemoths such as Netflix and Amazon are changing the way
consumers watch and pay for content.

© WHU Finance Society e.V. Deal Logic – Twenty-First Century Fox / Walt Disney 1
 Deal Summary
All values in USDm, except Price, Initial (USD) & Price, Paid (USD)

Summary Synopsis Rationale

Target Twenty-First Century Fox, Inc. § Walt Disney Company agreed to acquire the entire share capital of § The purpose of the transaction is for Walt Disney to expand its
Twenty-First Century Fox, a New York-based provider of cable direct-to-consumer offerings and accelerate its use of innovative
Acquirer The Walt Disney Company
and television services technologies
Date, Announ. 14.12.2017 § Walt Disney offered a choice of USD 38 in cash or USD 38 in § The acquisition will make Disney the market leader in the
common shares; originally Walt Disney offered 0.2745 common competitive studio film industry with a consolidated share of
Date, Effective Pending share per Fox share 31.1% in market revenue
Deal Attitude Friendly § The offer followed a bidding war between Walt Disney and its § Twenty-First Century Fox Inc. aims at increasing its shareholder
direct competitor Comcast and will include Fox's film and value through the deal, partially by downsizing the company
Cash (41.8%) / Stock (41.8%) /
television studios, as well as partial ownership of Sky TV, India's § Total pre-tax synergies are calculated to be USD 2.0bn and are
Consideration Other (16.4%)
Star, and Hulu expected to realize end of 2021
%Held/%Sought 0.00 / 100.00 § Shareholders of both companies have already approved the
acquisition valued at a total of USD 71.3bn
Deal Value 84,197

Price, Initial n/a LTM Transaction Multiples Financial Advisors

Price, Paid 38.0
Target Acquirer Industry† Target Fees Acquirer Fees
Total Fees 133.5
EV/Sales 3.4x 3.2x 2.0x Goldman Sachs 58.0 Guggenheim Securities 25.0
Premium*, 1d 52.2
EV/EBITDA 15.5x 10.3x 6.4x Centerview Partners 22.0 JP Morgan 25.0
Premium*, 1w 44.0
EV/EBIT 17.0x 12.3x n/a Deutsche Bank 1.5 Citi 2.0
Premium*, 4w 43.0
P/B 4.4x 3.5x 0.9x

P/E 25.3x 15.6x 10.3x

* Pre-bid (%)
Sources: Thomson Reuters Eikon † Of Target, SIC: 4841

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 Twenty-First Century Fox – At A Glance
All values in USDbn, except EPS

Recent News* Company Description Key Financials

§ 2018/09 21st Century Fox announces § Twenty-First Century Fox Inc. is a diversified global media and 2017A 2018A 2019F 2020F 2021F
intention to dispose its entire stake in Sky entertainment company which currently manages and reports
Sales 28.5 30.4 31.5 33.3 35.2
to Comcast. businesses in the following four segments:
§ 2018/06 21st Century Fox sets July 27 for § Cable Network Programming: Consists of the production and % growth 4.3 6.7 3.7 5.7 5.6
special meeting for vote on merger licensing of programming distributed material
EBITDA 7.0 6.8 7.3 7.8 8.5
agreement with the Walt Disney § Television: Consists of the broadcasting of network
Company. programming in the U.S. % margin 24.7 22.4 23.2 23.5 24.2
§ 2018/06 21st Century Fox confirms § Filmed Entertainment: Consists of the production and
receipt of unsolicited acquisition proposal acquisition of live-action and animated motion pictures for Net Inc. 3.0 4.5 3.7 4.1 4.8
from Comcast over the same businesses it distribution and licensing in all formats % margin 10.5 10.5 11.7 12.4 13.6
agreed to sell to The Walt Disney § Other, Corporate and eliminations: Consists of corporate
Company. overhead costs and intercompany eliminations EPS 1.61 1.71 2.00 2.25 2.59
§ 2016/12 Agreement with Sky, in terms of
a pre-conditional cash offer by the Key Management & Ownership Structure Sales Split FY2018
company for the fully diluted share capital
of Sky.
11% 16% 13%
James Murdoch
7%
CEO
Since 2015

28% 56%

John Nallen 82% 87%

CFO
* Prior To Deal Since 2013 TCI Fund Management Cable Networking Programming
Sources: Thomson Reuters, Annual report 21st The Vanguard Group Filmed Entertainment US/Canada Europe
Century Fox; 21st Century Fox Other Television

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 The Walt Disney Company – At A Glance
All values in USDbn, except EPS

Recent News* Company Description Key Financials

§ 2018/07 21st Century Fox and Disney § The Walt Disney Company, together with its subsidiaries and 2017A 2018A 2019F 2020F 2021F
stockholders approve acquisition by affiliates, is a leading diversified international family entertainment
Sales 55.1 59.4 60.6 63.3 65.6
Disney. and media enterprise. It was founded in 1923 in California and has
§ 2018/06 US regulators have cleared Walt approximately 201,000 employees. Its main businesses are: % growth (0.9) 7.8 2.0 4.5 3.6
Disney Co’s plan to buy most of 21st § Media networks: Comprises an array of broadcast, cable, radio,
EBITDA 16.7 17.9 17.5 17.9 18.7
Century Fox, removing a final barrier to publishing and digital business
the USD 71.3bn deal. The approval § Parks, Experiences and Consumer Products: includes Parks % margin 30.2 30.0 29.0 28.3 28.5
requires the sale of Fox’s regional sports and Resorts, toys, apps, apparel, books, and stores
networks in the US due to antitrust § Direct-to-consumer and international: includes the Net Inc. 9.0 12.6 10.6 10.8 11.3
concerns. international media business and streaming services % margin 16.3 18.3 17.5 17.0 17.2
§ 2018/06 Disney increases its offer for 21st § Studio entertainment: includes movies, music and stage plays
Century to USD 71.3bn in cash and EPS 5.69 7.23 7.09 7.27 7.63
shares, up from an earlier USD 52.4bn
offer. This equals a USD 10 increase per Key Management & Ownership Structure Sales Split FY2018
share.
§ 2017/12 The Walt Disney Company
7% 10%
announces plans to acquire Twenty-First 4%
Bob Iger 25%
Century Fox, Inc., after a spinoff of CEO 12%
certain businesses, for USD 52.4bn in a 41%
Since 2005
stock deal.

78%
Christine McCarthy 89% 34%
CFO
* Prior To Deal Since 2015 The Vanguard Group Media Networks
Sources: Thomson Reuters, BlackRock Theme Parks & Resorts US/Canada Europe Asia Pacific
thewaltdisneycompany.com; bbc.com Other Other

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