Newsletter: Published Wednesday, 18 July 2018.


Nobody thought Rupert Murdoch would ever sell his entertainment assets.

Which is why the proposed Disney takeover of 21st Century Fox (of which the Murdoch family trust controls about 17% of votes) is generating such a fuss. This is a once in a lifetime deal!

The package of assets includes 20th Century Fox (which holds all television, movie and studio rights and the Fox Networks Group), Sky channels in Europe, National Geographic and all its subsidiaries, and Star TV (which has the worldwide TV and digital rights for all international cricket matches to be played in India until 2023).

That said, the deal won't be able to go ahead unless Disney sells 22 regional US Fox Sports channels (because it already owns ESPN).

It looks like Murdoch doesn't have any plans to relinquish his news businesses - how weird! - but perhaps doesn't want to compete with the rise of tech companies and on-demand entertainment services, and may prefer to leave that to somebody else.

And because media companies - like Disney and Comcast - are acutely aware of how much solid content Netflix and Amazon are making, it seems to us they are hoping to grow by merging with, or acquiring, media companies.

Which helps explain the bidding war for 21st Century Fox.

(The Spaceship Universe Portfolio's underlying assets include shares in Disney, Netflix and Amazon and the Spaceship Index Portfolio's underlying assets include shares in Comcast).

This is a rundown of events so far:

  • Last December, Disney offered $US52.4 billion for Fox Entertainment.
  • Comcast didn't actually say, but could have been thinking something like "Oh wow, didn’t realise those assets were for sale!" and then lobbed in a $US65 billion offer.
  • But it seems to us like Disney wouldn't give up that easily, so it wanted to make a counter offer of $US71.3 billion - which, if accepted, would mean that it could expand its offering to include The Simpsons (who actually predicted this deal 20 years ago!), Alien, Predator and the X-Files (just imagine the rides at Disney World!).
  • It would also be able to enter the content streaming game with Hulu (a multichannel video provider with live TV, including live sports).

Disney also has a great track record of buying franchises (Pixar, Marvel, Star Wars).

So, in late June this year, Disney asked all its shareholders if it they were okay with the company putting in another bid at $US71.3 billion.

Shareholder voting enables shareholders to influence a company's operations and activities.

Proxy voting is where a vote is cast by a fund manager (like Spaceship Capital Limited) on behalf of members of a fund (like the Spaceship Universe Portfolio).

Spaceship seeks to vote all proxies in accordance with the best interests of members.

Because Spaceship (as the responsible entity for the Spaceship Universe Portfolio) is the holder of shares in Disney, we were asked to respond to the following questions in relation to the $US71.3 billion bid:

  • If the deal is approved, can Disney swap Disney shares for 21st Century Fox shares?
  • Can Disney make some changes to Disney’s dividend payments and shares?
  • If the company doesn't get enough votes, can we adjourn a special Disney approval meeting?

We voted YES on the three matters.

Spaceship thinks the Murdoch family trust is likely to want to own Disney stock because it can still exercise a large shareholding voting power. (It would mean the Murdoch family trust is swapping Disney shares for 21st Century Fox shares and a bit of cash and possibly the capacity to rollover his holding a way that won’t generate a tax bill).

As part of the proposed takeover, Disney has promised to sell off 22 regional US Fox Sports channels. According to American antitrust laws, they can’t keep them and also own ESPN. That sale will give them around $US22.4 billion in the flip.

Spaceship likes Disney because it has an incredible machine: parks, distribution channels, toys, through which it has successfully pushed the Marvel, Pixar and Lucasfilm. Even though those deals seemed quite expensive when they happened (they acquired Marvel and Lucasfilm for around $US4 billion each and Pixar for around $US7.4 billion) they’ve since generated so much more money, they’ve paid for themselves many times over.

The likes of The Simpsons (who predicted this takeover 20 years ago!), Avatar and the whole power of the Fox Studios creative suite are ripe for a similar treatment.

If the proposed takeover goes ahead, then Disney will be a powerful competitor to go up against content juggernauts like Netflix and Amazon'. Indeed, Apple is reportedly inking deals with Hollywood stars to produce original content, though details are scant. Even though the underlying assets of the Spaceship Universe Portfolio includes shares in Netflix, Amazon and Apple, competition is a wonderful mechanism for businesses to constantly innovate, search for efficiencies and to grow.

The proposed takeover of 21st Century Fox by Disney is a large and complex deal. And in the background another media merger court battle is going on between AT&T and Time Warner, and Murdoch is also offloading his UK pay TV provider Sky (which Comcast is bidding separately for).

As it stands, everyone is waiting to see if Comcast will come back and bid again for the Fox entertainment assets.

** Header image copyright of 20th Century Fox Studios, 2018.