Pact is aimed at helping both companies fend off threat from
digital giants like Netflix
By Ben Fritz, Amol Sharma and Sarah Rabil
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (December 15, 2017).
21st Century Fox Executive Chairman Rupert Murdoch invited Walt
Disney Co. Chief Executive Robert Iger to his winery in Los Angeles
last month as the executives were trying to nail down a deal that
would mark a turning point in both of their careers.
After a lunch of chicken and salad, the executives opened a
bottle of Chardonnay and walked through the vineyard to hash out
terms under which Disney would buy Fox assets, people familiar with
the discussions said. A few weeks later, as the talks reached the
final stretch, the same property was threatened by a 422-acre brush
fire that swept through the upscale Bel Air neighborhood.
The winery survived, and so did the deal.
Disney said Thursday it agreed to buy most of 21st Century Fox
Inc. for $52.4 billion in stock, in a deal that would give Disney a
dominant position in movies and sports and help bolster its
flagging television business as it prepares to directly challenge
digital giants like Netflix Inc.
Disney is buying the Twentieth Century Fox television and film
studios, cable networks including FX and National Geographic
Channel, Star India, a 39% stake in Sky, 22 regional sports
networks and majority control of streaming-video service Hulu.
Mr. Iger said on a conference call that the deal will give
Disney new film- and TV-production capabilities, plus franchises
including Fox's Avatar and the X-Men; expand Disney's comparatively
weak international television presence; and advance his goal of
building direct relationships with consumers online.
The deal will allow Disney to "create more content, serve
consumers better on the domestic and international level and
essentially grow our offerings to consumers in multiple ways," he
said.
Disney also will assume about $13.7 billion of 21st Century
Fox's debt, bringing the total value of the deal to $66.1 billion.
The deal is expected to generate about $2 billion in synergies from
cost-cutting.
The pact is the biggest in Disney's history and could be
legacy-defining for Mr. Iger, whose success in his 12-year tenure
has been based largely on building Disney around key brands he
acquired, including Pixar, Marvel and Star Wars. Now he is betting
the company's future depends on expanding beyond those franchises
and delivering a broader set of content directly to consumers over
the web.
The deal also marks the end of an era for 86-year-old
billionaire Mr. Murdoch, who built the entertainment business over
decades and who has long been considered a buyer and creator of
assets around the globe.
The remaining Fox company that will be spun off as part of the
deal will have assets including the Fox News and Fox Business cable
news networks, the FS1 cable sports channel, the Big Ten Network
and a television broadcasting business that consists of 28 local TV
stations and the Fox broadcast network.
"We're pivoting back to our first love, which is news and sports
-- things that happen in real time," Mr. Murdoch said in an
interview Thursday. "We're proud that we make great movies and TV
shows, but it takes a long time."
The deal talks began this summer during a casual meeting between
Messrs. Iger and Murdoch to discuss the state of the media business
and the disruptive impact of technology, the executives said. Mr.
Iger followed up with a phone call to the Fox chairman a few weeks
later and "posed the notion of taking this seriously and possibly
considering the two of us merging," Mr. Iger said on CNBC
Thursday.
Mr. Murdoch was open to hiving off entertainment assets. "We're
conscious that the way people watch scripted entertainment has
changed," he said in the interview. "It's harder to monetize.
That's been happening as a result of technology and people's
habits."
Though Mr. Murdoch has long been a buyer, there were no
appealing options.An attempt to buy Time Warner Inc. in 2014 was
unsuccessful. "Who would we acquire?" he said.
The initial Disney-Fox talks broke down in October, then
restarted a few weeks later, with significant gaps remaining,
including how Fox would be valued and how to handle regulatory and
tax issues.
A breakthrough came on Nov. 19 at the meeting at the Moraga
winery, people familiar with the discussions said. Disney's chief
strategy officer, Kevin Mayer, was also present, as well as John
Nallen, Fox's chief financial officer, a top lieutenant of Mr.
Murdoch and key architect of the deal. During the winery visit, the
executives resolved nearly all the major issues except price, one
of the people said.
On Tuesday of this week, Messrs. Murdoch and Iger had lunch in
London, by which time the deal was essentially done, the people
said.
James Murdoch, Mr. Murdoch's son and Fox's chief executive,
spoke to Mr. Iger on a regular basis throughout the process, the
people said, adding that Mr. Iger has asked him to help plan the
integration of the Fox assets. Mr. Iger said the men will continue
to discuss whether there is a role for James Murdoch at Disney in
the future.
Disney wasn't the only company to reach out to Fox about a deal.
Verizon Communications Inc. did so in September, according people
familiar with the discussions. Cable giant Comcast Corp. also
pursued an acquisition of Fox assets. Mr. Murdoch said he opted for
a deal with Disney largely because he felt it would be an easier
sell in Washington and wouldn't require major structural
concessions. "That was the deciding factor," he said. "We didn't
want to go through that for a year and a half and have a crippled
company handed back to us."
Mr. Iger said on the investor call that while he expects
significant scrutiny from governments, he believes regulators
"should quickly conclude the aim of this combination is to create
more high-quality product for consumers around the world and to
deliver it in more compelling, innovative ways."
Disney said it expects to receive all the needed approvals to
close the deal in 12 to 18 months. If government regulators block
the deal, Disney will have to pay Fox a termination fee of $2.5
billion, according to a Disney regulatory filing.
As part of the deal, Disney's board is extending Mr. Iger's
contract past its previous expiration in July of 2019. He will now
stay on as CEO through the end of 2021 if the deal closes,, Disney
said, and is eligible for stock awards of up to $142 million at the
current share price. His base salary and target bonus will also
rise.
21st Century Fox shareholders will own 25% of Disney after the
all-stock transaction, and the Murdochs have positioned the deal as
a way for investors to benefit from Disney's giant content machine
and bolstered efforts to deliver entertainment directly to
consumers.
21st Century Fox shareholders also will retain their existing
ownership of the spun-off Fox, which will have about $9 billion in
debt and $10 billion in annual revenue.
Some analysts are predicting the leaner Fox could pursue its own
acquisitions.
In 2013, the Murdoch family split its media empire, putting
entertainment assets in 21st Century Fox and publishing assets,
including The Wall Street Journal and newspapers in the U.K. and
Australia, in a new News Corp. Mr. Murdoch has contemplated
reuniting News Corp with the new Fox but it is unlikely in the near
term given complexities including how to manage the potential tax
bill, people familiar with the matter said.
The breakup of 21st Century Fox comes with trade-offs. The new
Fox will primarily draw revenue from fees paid by TV distributors
and advertising sales, leaving it more exposed to the shifting
television landscape where cord-cutting and new streaming
competitors have reduced ratings and pay-TV subscribers.
Also, the Fox broadcast network will be severed from the
Twentieth Century Fox television studio, which produces most of its
shows. "We can make our own programs," the elder Mr. Murdoch said
on a conference call. Fox will still buy from Twentieth Century Fox
Television, and independent studios such as Warner Bros. and Sony
"will be looking to us to buy programs," he said.
The Fox network has been struggling for years. Sports rights
help Fox command significant carriage fees from pay-TV distributors
and its own affiliates, but if its entertainment ratings sink
further, maintaining that leverage could be a challenge.
The leadership and management structure of the new Fox is still
being figured out, Lachlan Murdoch, currently executive co-chairman
of 21st Century Fox alongside his father, said on the call. A
person familiar with the situation said Lachlan is likely to become
the CEO.
--Joe Flint contributed to this article.
Write to Ben Fritz at ben.fritz@wsj.com, Amol Sharma at
amol.sharma@wsj.com and Sarah Rabil at Sarah.Rabil@wsj.com
(END) Dow Jones Newswires
December 15, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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