DIS Walt Disney Co

By Ben Fritz, Dana Mattioli and Joe Flint 

Walt Disney Co. recently held talks to buy some of 21st Century Fox's cable-television networks, international distribution operations and movie and television studio, according to people close to the discussions, a tie-up that would have bolstered Disney's laggard TV business and allowed Fox to focus on sports, news and broadcast television.

The talks were no longer active by Monday afternoon when CNBC first reported them, according to these people. They were very preliminary and broke down over price and other key deal terms, according one of them.

Assets Disney would have acquired included the FX cable network, Twentieth Century Fox studio and Fox's 39% stake in U.K. pay-television giant Sky PLC.

The talks come as media content and distribution companies have been rapidly consolidating over the past several years and consumers embrace new platforms that have established companies fearful for their futures. Acquiring some of Fox's assets would have given Disney a leg up in its effort to take more content directly to consumers, after worries about cord-cutting reducing subscribers to its key channels, particularly ESPN. For Fox, the deal could have been a bid to slim down to focus on news and sports -- content that has traditionally been highly valued by consumers and advertisers.

The deal would have immediately made Disney the biggest producer of television content, aiding its struggling television business and significantly increasing its exposure to foreign markets in which Fox has a stronger presence. It also would provide additional content for streaming services Disney is planning to launch in the next two years.

Not included in the discussion were Fox's broadcast-television network, local stations, sports channels, Fox News and Fox Business Network, one of these people said.

Disney views bolstering its television business as a priority. The 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. While the purchase of Fox assets under discussion wouldn't have affected a planned ESPN offering in 2018, they could have bolstered a family entertainment offering planned for 2019 and potentially even give Disney the content to add online offerings aimed at adults.

Disney has already announced it will end a deal in 2019 to sell streaming rights to its movies to Netflix, to preserve them for its own service. That decision will cost Disney more than $300 million, people with knowledge of the current terms said.

Fox's class A shares closed up 9.9% to $27.45 on news of the talks Monday afternoon, while Disney stock closed up 2% to $100.64.

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.

Fox Executive Chairman Rupert Murdoch has long sought full control of Sky, in part to further diversity Fox's revenue outside of North America. He abandoned a previous attempt to buy the broadcaster in 2011, before his company's split, after a phone-hacking scandal at one of his U.K. papers -- now shuttered -- triggered widespread political and public outrage.

Mr. Murdoch and his family control about 39% of 21st Century Fox's class B voting shares. He had spent the past several years setting up his sons to inherit his media empire. In 2013, he split his media empire into News Corp, owner of The Wall Street Journal and other newspapers, and 21st Century Fox, home to much of the entertainment assets.

Two years later, Mr. Murdoch stepped aside as chief executive of 21st Century Fox and handed the title to his son James Murdoch. His older son, Lachlan Murdoch, was named executive co-chairman at Fox.

A sale of assets to Disney would mark a significant reduction in the size and scope of 21st Century Fox, but it isn't the first time the family has contemplated a change in structure for the media company. In 2014, Fox pursued an $89 billion takeover of 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. The deal with Time Warner would have also combined large movie and television production assets, and Fox's shares have shown weakness in the more than three years since its bid, declining about 17% through last week.

Time Warner is now trying to close on a merger with AT&T that would combine the programming giant with the nation's biggest pay-TV distributor. Such a combination has other programmers fearful of losing ways to get their own content to consumers.

This past summer, Discovery Communications Inc. said it was merging with Scripps Media, creating a behemoth that would own many of the nation's most popular cable networks. Sinclair Broadcast Group., one of the nation's biggest owners of local TV stations, is trying to acquire Tribune Media Co., a deal which would give it a reach of 70% of the country.

Disney in particular has been worried about shifting consumer habits as its key channels, particularly ESPN, have lost subscribers due to cord-cutting. Pay-TV distributors are trying to create smaller bundles of channels to sell to consumers and programmers are worried that they might be left out. By combining, programmers can attempt to use their size as leverage to ensure that their channels continue to be fully distributed.

Fox owns one of the biggest and most successful TV-production studios, Twentieth Century Fox Television, which makes shows not only for its sister Fox broadcast network but also for CBS, NBC and ABC. Fox-owned shows include the NBC hit "This Is Us," ABC's "Modern Family" and CBS's "Life in Pieces." Along with Time Warner Inc.'s Warner Bros. Television, Twentieth Century Fox Television is one the largest suppliers of content to broadcast and cable networks. While Disney has a large television production business as well, it doesn't have the volume of hits that Twentieth Century Fox Television has.

Fox's entertainment cable networks include FX, which has several popular shows including "American Horror Story" and "Fargo." It also owns the National Geographic Channel, which has been investing heavily in scripted programming although has yet to break through with any big hits.

Fox's cable channels would have stood out at Disney because they are known for much more edgy and darker fare, and feature adult language and push the envelope in terms of nudity as well. Those channels would have potentially complemented Disney cable networks such as Freeform and Disney Channel, which are aimed largely at families, children and young adults.

Keeping the Fox broadcast network and its local television stations without owning a content machine could complicate the network's future. The reason Fox was launched some three decades ago was to ensure its TV studio would have a place to sell content.

Write to Ben Fritz at ben.fritz@wsj.com, Dana Mattioli at dana.mattioli@wsj.com and Joe Flint at joe.flint@wsj.com

(END) Dow Jones Newswires

November 06, 2017 16:39 ET (21:39 GMT)

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