By Ben Fritz, Joe Flint and Keach Hagey
Walt Disney Co. recently held talks to purchase a large chunk of
21st Century Fox's entertainment businesses, people close to the
discussions said, signaling that Disney is serious about bolstering
its laggard TV operations and that media mogul Rupert Murdoch is
open to a surprising restructuring of his empire.
Disney approached Fox in recent weeks about buying its cable TV
networks such as FX and National Geographic Channel, the Twentieth
Century Fox studio and international distribution operations, the
people said. Such a deal would have left 21st Century Fox focused
on sports, news and broadcast TV.
The talks, first reported by CNBC, ran into an impasse over
price and other key terms and have cooled substantially, though
they could be restarted, one of the people said.
Traditional media companies are racing to adapt to sweeping
industry changes that threaten their business, including the rise
of streaming-media services that are siphoning away cable TV
subscribers and mergers that have given tremendous clout to a
handful of distributors such as Comcast Corp., Charter
Communications and AT&T Inc.
Fox shares rose 10% on news of the talks, while Disney stock was
up 2%.
Acquiring some of Fox's prized assets would help Disney upgrade
its struggling television business, which has been hit by ratings
troubles and subscriber declines at networks such as Disney Channel
and ESPN. A deal would also give Disney more content for streaming
services it plans to launch in the next two years and would
significantly increase Disney's exposure to foreign markets in
which Fox has a stronger presence.
Fox wasn't happy with the terms Disney proposed, but is open to
the idea of selling the assets, people familiar with the matter
said. Fox for years hasn't been viewed on Wall Street or in the
media industry as an acquisition target because it was run by Mr.
Murdoch, who it was thought wanted to hand over the business to his
sons, James and Lachlan Murdoch. The Murdochs have a 39% voting
stake in 21st Century Fox.
Mr. Murdoch had spent the past several years setting up his sons
to take the helm. In 2013, he split his media empire into News
Corp, owner of The Wall Street Journal and other publishing
businesses, and 21st Century Fox, home to the major entertainment
assets.
Two years later, the elder Mr. Murdoch stepped aside as chief
executive of 21st Century Fox and handed the title to his son
James, while Lachlan was named executive co-chairman at Fox. The
elder Mr. Murdoch remains executive co-chairman.
A deal like the one contemplated with Disney would throw into
question that succession planning.
These days, the elder Mr. Murdoch, who has spent decades
building his interests in entertainment, has much of his attention
focused on Fox News, which would remain in the fold of 21st Century
Fox under the deal considered with Disney, the people say. Fox News
has been dealing with the fallout of sexual-harassment scandals and
adjusting to a prime-time lineup with new faces after high-profile
departures, though it has maintained its No. 1 position in the
cable-news ratings. The elder Mr. Murdoch took the reins at Fox
News last year after longtime boss Roger Ailes was forced out over
sexual-harassment allegations, over which the company has paid out
tens of millions of dollars in settlements. Mr. Ailes, who died
this year, denied the allegations.
Fox felt that if it sold off entertainment assets to Disney, the
slimmed-down news and sports-focused media company that remained
could be successful, just as CBS Corp. has been a top performer
despite not being among the largest media conglomerates, one person
familiar with the situation said.
The last major deal the Murdochs were known to have pursued was
a 2014 attempt to purchase Time Warner Inc., the owner of CNN, HBO
and Warner Bros. But Fox abandoned its pursuit after Time Warner
rebuffed its advances and Fox's stock price declined. AT&T Inc.
is now in the process of acquiring Time Warner, pending regulatory
approval. Since the failed pursuit of Time Warner, Fox shares had
fallen 17% before Monday's news as the broader market climbed.
Under the deal being discussed, Disney would have acquired Fox's
39% stake in U.K. pay-TV company Sky. Fox has bid $15.5 billion to
buy the rest of Sky to help expand its global media empire, but the
deal has been held up by the U.K. government as it continues to
review whether the acquisition would put too much power in the
hands of one media company.
The talks with Disney could "put a question mark" over Fox's Sky
acquisition proposal, according to Credit Suisse analyst Omar
Sheikh. One of the people familiar with the situation said in light
of the stalled talks, the company will continue to pursue the Sky
transaction.
Disney's TV unit, driven by ESPN and to a lesser extent by the
Disney Channel and ABC broadcast network, reported an 11% drop in
profit in the nine months ended July 1. The company has been hit
hard by cord-cutting and viewership is down at its family-targeted
channels.
Disney also has less TV business in developing markets than
competitors like Fox, making it more vulnerable to U.S. trends like
declining subscriptions to traditional cable and satellite TV
packages.
Disney Chief Executive Robert Iger in July announced plans to
launch a pair of subscription streaming services to help battle
rivals like Netflix Inc., from which it is pulling its new movies
at the end of next year.
While the purchase of Fox assets under discussion wouldn't have
affected a planned ESPN streaming offering in 2018, it could have
bolstered a family-entertainment offering planned for 2019. A deal
would also give Disney majority control of the streaming service
Hulu, which could be positioned as an adult-targeted streaming
service. Disney and Fox each currently owns 30% of Hulu. Comcast
Corp.'s NBCUniversal and Time Warner Inc. own the rest.
"We see the real strategy here as Fox content helping Disney
build out its direct-to-consumer strategy," said RBC Capital
Markets analyst Steven Cahill.
The assets Disney was looking to acquire from Fox include
Twentieth Century Fox Television, which produces content for the
Fox network and rival networks, including the NBC hit "This Is Us,"
ABC's "Modern Family" and CBS's "Life in Pieces."
Fox's cable channels such as FX, known for edgy fare with adult
language and content, contrast with Disney's sweet spot of
family-oriented fare.
The international business could be a key attraction for Disney.
Fox says its international holdings help it reach more than one
billion subscribers in roughly 50 languages in more than 170
countries, spanning Europe, Asia, the Middle East and Latin
America.
--Dana Mattioli contributed to this article.
Write to Ben Fritz at ben.fritz@wsj.com, Joe Flint at
joe.flint@wsj.com and Keach Hagey at keach.hagey@wsj.com
(END) Dow Jones Newswires
November 06, 2017 20:00 ET (01:00 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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