Walt Disney (DIS) Aims to Win the Race for Premium Content

Canaccord's Aravinda Galappatthige weighs in on the greater implications in a post-Disney/Fox merger.

Walt Disney Co (NYSE:DIS) has officially rolled out the red carpet to buy all 21st Twenty-First Century Fox Inc (NASDAQ:FOXA) assets in a whopping $52.4 billion all-stock transaction; in fact, the total deal evaluates assets at an enterprise value (EV) of $66.1 billion. Investors are smiling as the House of Mouse’s shares have gotten a nice close to 3% jolt today in a market upturn.

Canaccord analyst Aravinda Galappatthige chimes in on a deal that “further promotes and extends the ongoing arms race for premium content.” With the entertainment empire already having revealed the strategy to launch direct-to-consumer (DTC) platforms for both ESPN as well as the company’s own family content, Galappatthige believes it is no doubt that DTC is a “key driver” for DIS stock. Pointing to Disney technology subsidiary BAMTech Media, the analyst sizes up the company’s takeover of a control stake in the subsidiary as another “key initiative in this direction.”

Netflix and Amazon have to have left Disney and its fellow major media conglomerate peers seething “with some degree of frustration,” Galappatthige wagers, especially when grasping “that these platforms in effect leverage these media companies’ own content.” Therefore, “Against that backdrop, DTC is a key initiative for all the major media entities,” asserts the analyst.

This begs the question of what lies in the bigger picture. Galappatthige answers the query of “So what does this mean?” with some closing thoughts, including a likely lift coming next for brand demand: “On one hand, SVOD platforms are accelerating programming budgets to compete and we are seeing an array of new entrants to OTT Video (e.g. FB, Apple, TMUS). On the other hand, the major media conglomerates are beefing up their content to set themselves up for successful DTC offerings. We believe these trends continue to support premium content providers like Entertainment One and Lions Gate. Not only do these trends boost demand for their key brands and productions, they potentially make them acquisition targets.”

Ultimately, “The combination of the already dominant Disney movie studio with 21st Century Fox would create a genuine superpower in the industry,” Galappatthige underscores.

TipRanks highlights a neutral Wall Street majority opinion on the great House of Mouse. Out of 16 analysts polled in the last 3 months, 6 are bullish on Disney stock, 7 remain sidelined, while 3 are bearish on the stock. However, is this stock overvalued or undervalued based on these analyst expectations? The 12-month average price target stands at $107.62, marking a nearly 3% downside from where the stock is currently trading.

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