NEW YORK (Reuters Breakingviews) - Walt Disney may be looking for a bit of two-for-one magic. The $160 billion entertainment conglomerate is on the hunt for technology to connect consumers directly with its movies and TV shows. It’s also in need of a successor to Chief Executive Bob Iger. A Netflix acquisition including founder Reed Hastings might just answer both dreams - though it would be pricey.
The Magic Kingdom lost some of its zip in 2015, when Iger indicated that fewer people were paying for its cable sports network and profit engine ESPN. Shares of Disney are off about 20 percent since then.
All the same, the company has been one of the forward thinkers in its business when it comes to bypassing traditional cable boxes. ESPN is part of new packages like Dish Network’s Sling TV. Iger splashed out $1 billion for a one-third stake in Major League Baseball’s streaming technology, with the option to buy it out.
Disney could, however, think much bigger. Netflix could provide more streaming know-how and 87 million subscribers worldwide. Hastings, meanwhile, has defied the odds in developing his 20-year-old creation from mail-in DVDs to an online leader and content producer. He could be a candidate to replace Iger, who is slated to step down in 2018.
Netflix would be expensive, though. It trades at well over 100 times next year’s estimated earnings, compared with Disney’s 16 times multiple. Assuming a standard 30 percent premium, the purchase would cost $65 billion. To match the $15 billion uplift from the market price in present-value terms, Iger would need to find over $2 billion in annual cost savings. That’s a big chunk, but Disney could plausibly substitute a third of the content Hastings plans to spend more than $6 billion a year to make and buy.
Netflix would still offer Disney an inadequate financial return. Sometimes, though, there’s more at stake, like leap-frogging into the latest technology and securing the right leader. The House of Mouse paid nearly 50 times earnings for Pixar in 2006, but the purchase solved strategic problems and reinvigorated its animation studio.
Asked recently about acquisitions including Netflix, Iger didn’t get specific but didn’t rule anything out either. Lots could go awry with a big, bold purchase, from a shareholder backlash to culture battles. Still, the storyboard is something Disney might want to sketch out.
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