In the spring of 2017, Rupert Murdoch sat down to a meeting in New York with his eldest son, Lachlan, and trusted executive John Nallen, and presented them with a piece of paper. On a sheet from a yellow notepad, the billionaire media mogul had sketched out an idea to split apart his sprawling Fox empire, according to people briefed on the meeting. Sports and news would go in one bucket, movies and television in the other.
A few months later, Murdoch hosted Disney chief executive Bob Iger at his Los Angeles vineyard for salad and chardonnay, where he planted the seed that would lead to a $71bn sale of the second bucket to Disney. The deal redrew the contours of Hollywood, flinging Disney into the streaming wars and allowing Murdoch to sell much of his life’s work at the top of the market.
That merger, which closed in 2019, has been abruptly thrust back into the spotlight this month, after activist investor Nelson Peltz blamed it for what he described as Disney’s “balance sheet from hell”. As he tries to force his way on to Disney’s board after building a stake via his Trian Partners firm, Peltz has fixated on the Fox acquisition as a blight on the legacy of Iger, one of the most respected CEOs in corporate America.
In a 35-page slide presentation slamming Disney’s strategy last week, Peltz devoted seven pages to the Fox deal. His argument is simple: the Fox acquisition was too expensive, saddled Disney with $14bn of extra borrowing — pushing its net debt position above $40bn — and prevented the company from returning cash to investors. Peltz believes that Disney vastly overpaid.
Peltz’s critique is timely. The Disney-Fox transaction set the stage for the frenetic “streaming wars”, spurring traditional media companies to spend billions to counter attack tech groups such as Netflix, Amazon and Apple that threatened to ravage their businesses.
In 2019, Iger’s aggressive strategy helped propel Disney stock to an all-time high. But in the harsh light of last year’s stock market sell-off, the expensive foray into streaming has few fans on Wall Street and Disney’s market valuation has been cut in half. In a sense, the Fox acquisition has become a referendum on streaming writ large.
“Disney decided to get into streaming. Rupert got out. In the short term, with the cost of competing in streaming . . . you have to keep squinting to see this make sense,” said analyst Michael Nathanson. “[The deal] allowed them to build a couple streaming businesses, but the jury is still out on streaming.”
Iger defined modern Disney through a string of acquisitions that spawned a box office run for the ages, giving the company unrivalled power in Hollywood. These purchases — Pixar in 2006 for $7bn, Marvel in 2009 for $4bn, and Lucasfilm in 2012 for $4bn — are widely viewed positively by executives, bankers and analysts in the industry. But the verdict on Iger’s Fox bet is less clear.
Peltz depicts Iger’s Fox purchase as an overzealous move made at the expense of profit. Over the past five years, Disney’s revenue increased by $24bn to reach $84bn, but in that same time operating margins almost halved and — after more than 50 years of steady payments — Disney has scrapped its dividend, a fact that Peltz traces back to Fox. Disney executives have said the dividend was suspended due to the pandemic’s impact on its business.
Since the closing of Disney’s acquisition of Fox in March of 2019, its stock price has fallen more than 7 per cent, while the benchmark S&P 500 index has gained more than 40 per cent.
Defenders of the Fox deal say that with the spectre of Netflix hanging over the entire industry, Iger had little choice but to act, according to interviews with multiple people involved in negotiating the deal.
They point out there was interest too from Comcast, whose chief executive, Brian Roberts, kicked off a bidding war with Iger, pushing the price from $50bn to $71bn.
“We had to do Disney Plus,” said one person who worked closely with Iger when the deal was struck, referring to the streaming service that the company launched in part with content acquired under the Fox transaction. “Prices were higher, multiples were higher at that time and we had a substantial competitor in Comcast that was nipping at our heels.”
Another person close to the situation said that without acquiring Fox, Disney would have been left trailing behind competitors like Netflix, or even ran the risk of being bought by Apple or another tech company seeking to push further into media. “It’s easy to say that the deal is bad now, but at the time Iger didn’t have many other options but to act,” said the dealmaker.
Fox gave Disney a bigger footprint in India with the Star television platform, operational control of the Hulu streaming service and big-name intellectual property such as The Simpsons and the Avatar series. The second instalment of the Avatar franchise became the sixth-highest grossing film of all time this week and three more movies are in the works.
“It was an important transaction for us,” a person close to Disney told the FT. “We acquired great talent [and] we acquired great content franchises that are important to building out our [streaming] platform. These are all important parts of our company today.”
In a presentation and proxy statement to shareholders on Tuesday, Disney came out fighting against Peltz, arguing that the Fox deal had been critical given the “secular change” in the media industry, something the activist investor seemed “oblivious to”.
“Would Trian have preferred that a competitor own [Fox]?” asked one slide.
But the fine print of Disney’s proxy statement also seemed to acknowledge that the deal’s returns have yet to meaningfully materialise. At a meeting last week where the board decided to reject Peltz’s request for a seat, members considered Iger’s record of “transformative acquisitions”, but also believed the benefits of the Fox deal “had been delayed by the [coronavirus] pandemic impact”, according to the statement.
There is one aspect of the deal that insiders unanimously agree on: it was a masterstroke for Murdoch, now aged 91. He sold the bulk of his empire at precisely the right moment in the era of easy money, paving the way for him to hand an estimated $2bn windfall to each of his six children.
“Murdoch proved once again to be one of the savviest media tycoons in history. He parted with his treasured asset at the peak,” said a dealmaker who has worked with him in the past but not on the sale of Fox. “He pocketed a killing and the rest is history.”