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News > Deals
Disney losing magic?
July 25, 2001: 3:10 p.m. ET

Mickey's house on block to get bought out, Vivendi, MSFT, GE, Comcast likely buyers
A Weekly Column by Staff Writer Luisa Beltran
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NEW YORK (CNNfn) - Vultures may be circling Walt Disney Co. as a slumping economy continues to take its toll on the House of Mickey, analysts said.

Walt Disney, the second largest media conglomerate behind AOL Time Warner Co., is facing a troubling time. Fresh off the heels of its $3 billion buy of Fox Family Worldwide, analysts are wondering what is in store for the magic kingdom.

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Luisa Beltran covers mergers and IPOs for CNNfn.com
The purchase of Fox Family gives Disney a strong cable platform for its broadcast and other family-oriented content. Fox Family reaches about 81 million cable and satellite television subscribers in the United States, making it Disney's second most-viewed cable station.

But the wonderful world of Disney lacks the distribution of its bigger rivals—namely AOL—and Disney shares, currently trading at around $26, are off nearly 40 percent from their 52-week high of $42.81. The content giant is also set to report third quarter results this week which are expected to show the effects of a slowing economy.

"Disney is on a teeter totter," said analyst Jeffrey Logsdon, of Gerard Klauer Mattison & Co. "It's equity value hovers down within 10 percent or so of a four year low."

"Disney's business continues to be softer than other media companies," added analyst Edward Hatch of SG Cowen Securities Inc.

It emerged Wednesday that Disney may be looking to solve its lack of "pipes" by leading a group of companies in a bid for AT&T Broadband.

Bigger and bigger

Burbank, Calif.-based Disney (DIS: up $0.06 to $26.53, Research, Estimates)  is getting pushed aside by its larger media rivals. Disney offers more than just its widely known characters like Mickey Mouse and Pluto but has broadcasting, Internet, theme parks and movies all under its magic kingdom.

Disney owns ABC television networks, which is second behind Viacom's CBS, as well as an 80 percent stake in ESPN, a 50 percent holding in Lifetime and 37.5 percent in A&E TV Networks. But Disney took a hit with its studio entertainment unit that recently produced the unspectacular Pearl Harbor and Atlantis films.

The Fox Family buy, its largest deal since it bought ABC/Cap Cities for $19 billion in 1996, is seen as an incremental change, said analyst Jordan Rohan of Wit SoundView.

The question now is how Disney will handle challenges posed by rivals AOL Time Warner, which owns both content and distribution, and News Corp., which is making a bid to become the world's largest satellite company.

For more on Disney's distribution problems

New York-based AOL Time Warner (AOL: down $0.51 to $43.24, Research, Estimates)  is currently the top media and entertainment conglomerate with assets such as HBO, Time Inc. magazines, Warner music and film divisions. AOL Time Warner, parent of CNNfn.com, has access to "pipes" via Time Warner Cable, which has more than 12.7 million customers, second to AT&T Broadband.

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Disney's Magic Kingdom
AOL also reaches nearly 30 million subscribers through its powerful online unit and its moniker "You've got mail" is also gaining on Mickey Mouse, which is the most recognizable cultural icon.

Another threat is coming from down under. Rupert Murdoch's News Corp. is in talks to acquire Hughes Electronics from General Motors Corp (GM: unchanged at $62.95, Research, Estimates). Hughes owns DirecTV, the No.1 satellite-television broadcaster, which has 10 million subscribers. Murdoch hopes to combine DirecTV with his own Sky Global Networks and create a $50 billion satellite company.

Sydney, Australia-based News Corp. (NWS: down $0.24 to $35.26, Research, Estimates)  already owns Fox Broadcasting Co. and the Hughes buy is an attempt to create the world's largest satellite system that will beam its shows into homes.

But New York-based Viacom Inc. (VIA: up $2.98 to $49.40, Research, Estimates) , the world's No.3 media company (behind AOL and Disney), may also be catching up. Viacom's CBS TV network scored huge ratings this year with its reality show "Survivor."

Other assets include Black Entertainment Television, MTV Networks, Paramount Pictures, the United Paramount Network (UPN), and an 82 percent stake in Blockbuster. The media company even owns the No. 1 U.S. radio station operator, Infinity Broadcasting Corp.

Sluggish returns

The slumping economy has affected all media firms. AOL Time Warner fell short of expectations last week when it reported weaker-than-expected second quarter revenue. But all media companies are suffering.

"There is a severe weakness in advertising since fourth quarter of last year and it will not improve until this year," said analyst Ed Hatch, of SG Cowen Securities Inc.

Disney is expected to report third quarter results sometime this week, analysts said. The magic kingdom's softening revenue is being further impacted by declining attendance to its many theme parks, which account for 40 percent of Disney's revenue, analysts said.

During the third quarter, attendance at Walt Disney World's four theme parks in Orlando slipped 7 percent to 8 percent, with a 5 percent to 6 percent decrease at Disneyland in Anaheim, California.

Earnings tracker First Call expects Disney to post 21 cents a diluted share for the quarter.

Disney's ABC network enjoyed strong ratings (second to CBS) but Disney's studio segment will be hit by the mediocre performance of Pearl Harbor and Atlantis.

"Disney continues to be softer than other media companies," Hatch said. "They are more vulnerable to downturn because of high ticket prices to theme parks."

Disney shares, trading at around $26, are also close to hitting a four year low, which raises the likelihood that someone could scoop them up, said analyst Jeff Logsdon, of Gerard Klauer Mattison & Co.

Most analysts agree that Disney will not get bought out in the near term but the company is facing pressure to turn itself around.

"The biggest criticism against Disney is that it hasn't used strategic acquisitions to leverage franchises," Logsdon said.

Disney used to have the largest market capitalization (around $56.1 billion) of all media firms but is now getting elbowed out by bigger rivals like AOL, whose market cap is nearly triple ($191 billion).

AOL is close to domination with its combination of "pipes and content." The conglomerate has assets like CNN, HBO and Time which it can send to users via Time Warner cable and AOL.

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Disney has produced classics such as "The Lion King"
For its part, Disney is content rich with its movies, Internet and broadcasting units but lacks the hardware for full-fledged distribution, analysts said.

"As the media business evolves, and companies are looking to mix both content with distribution, Disney must make some changes," Rohan of  Wit SoundView said. 

With the big getting bigger, the pressure is on Disney to decide its next stage of growth. "They've got to do something," Rohan.

It's buy of Fox Family is seen as incremental and not enough to help it compete against rivals. The most likely way to revolutionize the nearly 80-year old media firm. which produced classics such as Pinocchio and Fantasia, would be for another company to acquire it, he said.

The mostly likely buyer would be a company similar to the proposed AT&T Broadband-Comcast combo, analysts said. Last week, AT&T Corp. rejected Comcast Corp.'s $45 billion bid for it broadband unit. Philadelphia-based Comcast (CMCSA: up $0.48 to $36.05, Research, Estimates) , No. 3 U.S. cable operator, will likely return with a sweeter bid which could produce a stronger cable titan, analysts said.

"Comcast would be a monolithic and powerful distribution house with a lack of content," Rohan said. "QVC and the Golf Channel don't do it for me and Disney is content rich."

But any buy of Disney would not come this year and is likely three to five yeas off, Rohan said.

Vivendi Universal, Europe's No. 2 media company, also received a few mentions from analysts. Vivendi, which owns businesses such as Universal Pictures and pay-TV channel Canal Plus, reported earlier this week second-quarter earnings that jumped 53 percent.

But a combination of the France-based Vivendi (V: down $0.22 to $55.65, Research, Estimates)  would raise some regulatory obstacles.

"Vivendi behaviorally acts like they'd like to buy everything," said Gerard Klauer's Logsdon. "But we do have problems of foreign ownership of a domestic network."

AOL Time Warner is also out of the running for Disney, analysts said. AOL is still digesting its buy of Time Warner and a purchase of Disney would likely raise antitrust issues.

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Potential acquirers would also need the currency to buy Disney, which could easily fetch $35-to-$40 a share, valuing a purchase at about $70 billion to $80 billion, Wit SoundView's Rohan said.

An offer will likely be hostile since Disney CEO Michael Eisner probably won't give up the company without a fight (remember, Eisner ousted uberagent Michael Ovitz).

Last year, Disney also successfully beat Time Warner Cable when a contract fight caused it to take ABC off some of its cable systems. The Federal Communications Commission found for Disney when it ruled that Time Warner breached rules for dropping a station during ratings time period.

"Eisner is very entrenched in the organization," said SG Cowen's Hatch.

Only a couple of companies have the financial wherewithal to buy Disney.

General Electric Co., which was blocked in its $42 billion bid to buy Honeywell, does have the resources to attempt a Disney buy, one analyst said who declined to speak on the record. But GE's (GE: down $0.39 to $43.41, Research, Estimates)  ownership of the NBC TV network would raise too many antitrust concerns.

Redmond, Wash.-based Microsoft also has the cash and would value Disney's content and cable channels. While Microsoft (MSFT: down $1.68 to $65.80, Research, Estimates) has dabbled in cable, taking a stake in Road Runner, the company is still more software-focused.

Similarly, Viacom, which already owns CBS and UPN, would raise too may federal complications.

The mostly likely buyer? Wait for Comcast, or a similar company, to hook-up with a firm like AT&T Broadband. Better yet, any company that is dieing for content, and has the distribution channels, could make a play for Disney.

Disney could not be reached for comment. graphic

  RELATED STORIES

Disney buys Fox Family for $3B - Jul. 23, 2001

Revenue concerns dog AOL as profits grow - Jul. 18, 2001

Disney lacks pipes - Jul. 23, 2001

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