Yahoo Finance Disney Might Want to Kiss Fox Goodbye
After almost two years in limbo, the merger between AT&T (NYSE: T) and Time Warner (NYSE: TWX) was finally approved.
In this episode of MarketFoolery, host Chris Hill and analyst Matt Argersinger discuss how this decision changes the market. Judge Richard Leon did not mince words in his verdict, which could mean huge things for the short-term future of mergers and acquisitions. How does this deal compare to the ill-fated joining of AOL and Time Warner from the dot-com days of yore? Additionally, Comcast's (NASDAQ: CMCSA) counterbid for Fox (NASDAQ: FOX) (NASDAQ: FOXA) will probably get a lot more competitive now -- so competitive that Disney (NYSE: DIS) will probably be better served by backing out.
A full transcript follows the video.
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This video was recorded on June 13, 2018.
Chris Hill: It's Wednesday, June 13th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio, Matt Argersinger. Good to see you!
Matt Argersinger: Hey! Good to be here!
Hill: I was just up in the motherland. [laughs] I just flew in from Boston.
Argersinger: I'm so jealous, after the story you just told.
Hill: It was a good night. I'm not going to lie, last night was a good night. I went and saw Dave Chappelle and Jon Stewart at the Wang Center, which has a new name. They have a sponsor. Everyone still calls it the Wang Center, but it has some other sponsor there.
Argersinger: I was wondering about that. If you've followed stock market history, the Wang Corporation isn't quite where it was when it named that particular theater The Wang Center 25, 30 years ago.
Hill: Back in the day, that was a great tech stock to own, Wang Laboratories, absolutely. Not so much today.
Argersinger: No.
Hill: But, an amazing venue, for anyone who has the opportunity. And, there are other places like this around the country and around the world. But, it's one of those brilliantly designed theaters where the acoustics are amazing and the sight lines are amazing, which is great, because we were in the third balcony. It was a phenomenal show. And then I got home and watched the end of the end of the Red Sox game.
People don't want to hear about that! People want to hear about AT&T and Time Warner, which finally, that deal got approved, an $85 billion deal got approved. We'll get to be particulars. One of the things, I was saying this to you earlier, that I was struck by as I was driving to the airport earlier today and listening to some of the coverage of this story, was the discussion of the actual verdict handed down by Judge Leon, who's the federal judge appointed by President George W. Bush. And, for anyone who has watched this AT&T-Time Warner deal drag on through the courts for ...
Argersinger: Almost two years.
Hill: I was going to say, north of 18 months, this has been going on. For anyone who watched this and thought, "Well, whenever they get to a decision, I'm sure that the judge, the way it will be worded will be something along the lines of, This was a really tough decision with merits on both sides, but ultimately I decided to side with this one." No. That was not the case at all. [laughs] The coverage I was listening to, all they could talk about was, Judge Leon wrote a decision where he basically said to the federal government, "Don't waste my time with this anymore, you had a ... " I think the phrase he had was "gossamer-thin."
Argersinger: I know! I've heard that before, but that was the first time I'd heard that in a federal court judgment call.
Hill: Yeah, a federal judge saying to the federal government, "Wow, this was pathetic on your part. Don't appeal this. If you do appeal this, I'm not going to grant a stay. But, do everyone a favor and don't appeal this, because this has been a waste of time and money."
Argersinger: Yeah. It was remarkable, to see it come to that swift of an end and that decisive of a decision, because it has been north of 18 months that we've been hearing about this and wondering if this was ever going to happen.
And now that it has happened, I have to say, I can't help but think, though, AT&T-Time Warner, I keep reminding myself of AOL-Time Warner, which of course, roughly 20 years ago now, kind of signaled the end of that .com era. Maybe this is how much of a nerd I am, but I remember where I was when AOL-Time Warner was announced. I was sitting with some buddies in college, and we were marveling at the size of this deal, and how a company like AOL, which was just a .com company -- I mean, the biggest .com company at the time, with tens of millions of subscribers -- but, they were buying Time Warner, this generations-old media company.
Hill: And a content-rich media company.
Argersinger: Oh, yeah!
Hill: And at the time, because I'm older than you, and I also remember this deal well -- not all of our listeners do, but I'm sure some of them do -- AOL-Time Warner, at the time, first of all, it was a deal that was roughly twice the size of this one. It was a $160 billion deal. And, at the time, once people got over the fact that, here's this young, upstart tech company, AOL. It's not the other way around. It's not the decades-old media company, Time Warner, buying AOL. It's the other way around. Once people got over that, much of the narrative was, "Holy cow, this is the future. This is how it's going to look. AOL has the platform, they have the distribution system."
Argersinger: "They have the eyeballs."
Hill: "They have the eyeballs. And Time Warner has all this content. They have Time Magazine, they have Sports Illustrated, People, they have all these different magazines and properties. This is going to be fantastic!" That was day one, and it was all downhill from there.
Argersinger: [laughs] That's right. It was the opposite of fantastic for shareholders, especially. But, I can't help but think, we're talking about similar things today. You're talking about AT&T, which has well over 100 million subscribers when you talk about their mobile business and their DIRECTV business. Time Warner has its own cable business -- or, it did, before it was split off. You're combining this deep well of content from Time Warner -- CNN, HBO, TNT -- and one of the biggest distribution businesses, networks, in the world, and that's AT&T.
This is, by all accounts, what they call a vertically integrated merger. You're not taking two of the same businesses. You're taking a business that does one thing really well and another business that presumably does something really well, as well, and merging them together. And it's happening now. I feel like they said they were going to close the deal as early as next week. It just shows you how fast things are turning here. But, I definitely think this opens the floodgates for a lot more similar consolidation like we're seeing right here.
Hill: This was one of the things I heard, there was a reporter who checked in with some sources at Wall Street banks and said there were a lot of people in the mergers and acquisitions division that were either changing or flat-out canceling their summer vacation plans because they're expecting a lot of M&A activity. I think we should probably just start with Comcast.
Argersinger: Yes.
Hill: With Disney making the bid for Fox's assets, and Comcast, it seemed like there was at least a little bit of tension within Comcast regarding how hard they should go after Fox's assets, and I think a little bit of that tension had to do with the fact that, up until now, there hadn't been a ruling on AT&T-Time Warner. So, if you're inside the conference rooms at Comcast, and you're arguing, "Maybe let's not go after that," at least part of your argument has to be, "Look, this could be a waste of time and money. This could be shot down." Now, the light could not possibly be greener, in terms of, what will approval be from the judiciary. Right now, it's like, "Yeah, no, this is going to get approved."
Argersinger: Especially if Judge Leon happens to oversee the Comcast-Fox deal. [laughs]
Hill: [laughs] Right.
Argersinger: But, I totally agree. I expect as early as tomorrow, perhaps even tonight, Comcast is going to come out with a strong formal bid for Fox that should, by all rumors, largely trump what Disney has offered. And, there's rumors that it's going to be an all-cash deal, which is obviously going to be more enticing, and should be more enticing to Fox shareholders and insiders. So, I think that happens. I think Verizon could be doing a big content deal at some point. They already have, but they probably do more. I think a company like T-Mobile is probably going to say, "Hey, we need to get into the content business, as well."
Now, I will say, these kinds of megadeals generally haven't worked out for shareholders in the past. AOL-Time Warner is a poster child for that. As a shareholder, if I'm a shareholder of AT&T, or a shareholder of Comcast, that's going to make this Fox deal, you have to wonder if this is going to really work out for me, if the benefits that all these companies can see, if the synergies, if all of these eyeballs and all of this new content's really going to come together and create long-term value, you have to be skeptical of that.
Hill: Steve Case, who was heading up AOL, and therefore heading up the AOL-Time Warner deal, he was on CNBC today, essentially offering some unsolicited advice to AT&T regarding this merger. He pointed to a couple of things which maybe aren't necessarily news, per say, because you can go back and study why that deal ultimately didn't work out and come to these conclusions. But, I feel like, it has more weight when it's coming from Steve Case himself, because he's the one overseeing these mistakes. He talked about the very different cultural fits that they were trying to make work, and how they ultimately did not make those work.
The other thing he said -- this ties into something we talked about on Motley Fool Money last week -- he talked about the focus on the short-term, saying that when he thinks back on that deal, the focus that everyone involved had was, "Not only do we need to make this work, but we need to show results immediately for the next quarter and the quarter after that," as opposed to, "Hey, what's going to work three years from now? What can we do to make this work in the long term? Because, if all we do is focus on the short-term, we're going to blow this."
Argersinger: That's right. I caught a little bit of that interview. One other thing that I think Steve Case said was, when they did the AOL-Time Warner deal, it was all about offense, trying to put these things together and really spread content across the internet, the young internet at the time. And this might have been burying the lede a little bit, but I can't help but say that what the AT&T-Time Warner deal is and what the potential Comcast-Fox deal is, it's all about playing defense. And they're playing defense against Netflix (NASDAQ: NFLX).
Hill: Yes!
Argersinger: And, this is something that a lot of shareholders or investors might find remarkable. This used-to-be-tiny video streaming/ DVD by mail company, today, Netflix is worth more than twice of the $85 billion deal for Time Warner. Netflix now is $10 billion bigger than Disney! So, what makes Netflix so great? If you think about it, it's simple, it's cheap, it's personalized, it's platform-agnostic, it's accessible anywhere you want to be as long, as long as you have a strong internet connection. It's such an amazing value proposition for so many subscribers out there.
That's the model all of these companies are chasing, in a way, but they're doing it by going after older media assets, legacy distribution businesses. It's interesting to see if them playing defense actually hurts them in this pursuit or defense against the Netflixes of the world, the Amazon Primes of the world, the Hulus, the new ways content is being distributed and viewed around the world.
Hill: You look at shares of Netflix, which are up 5% today --
Argersinger: [laughs] I know!
Hill: -- which is incredible when you consider that, there were presumably smart analysts coming out over the last couple of days -- as, we knew at the end of last week that the decision on AT&T and Time Warner was coming this week. We've known for a little while now that this thing was coming. And, in the lead-up into it, you get this sort of, "If the deal gets approved, who are the winners? Who are the losers?" More than a couple of smart people coming out and saying, "Well, if this deal gets approved, Netflix is absolutely a loser in this deal." And it's like, well, I suppose, in theory, that makes sense, but at least in the short-term voting machine of the investing world, no, Netflix up today.
Argersinger: I think that's more telling.
Hill: Another winner, obviously, is Fox. Shares of Fox are up 10% just in the last 24 hours. There is every reason to believe that, as you said, Comcast is going to come out with a formal bid. Whatever it was going to be a month ago, it's probably going to be a little bit higher now. And yet, don't we have to assume that Disney is going to restructure their offering? Or, do they just wait and see?
Argersinger: Let me say, I hope not, as a Disney shareholder. One of the reasons I think Disney was up a little bit today is because the market is saying, "Comcast is going to submit their bid, it's going to trump Disney's bid." If Fox behaves rationally and capitalistically, as we think they should, they'll probably take the Comcast deal unless Disney does something. But, I think the market might be saying, "You know, Disney, hey, Bob Iger, you might not need this deal. You might not need to spend the tens of billions you're going to need to spend to buy Fox, or get in this bidding war with Comcast and end up paying a huge premium."
I almost think that the market is saying, "You know, Disney, this might be an opportunity to say, 'You know what? We're going to step back, we're not going to get in a bidding war, we're going to focus on the assets that we have, the new distribution avenues we're looking for.'" Maybe this actually brings Disney and Netflix back together in some kind of new distribution licensing agreement. I don't know. I just think, as a Disney shareholder, I would say there are probably better things Disney could be investing its capital in, certainly than getting into a bidding war with Comcast.
Hill: And, you look at the coverage of Rupert Murdoch, and it certainly seems like, in terms of his heart, he would prefer that these assets end up with Disney, because he thinks Disney and Bob Iger are going to be better caretakers of these. But everything that we've read over the past month or so points to, not just Comcast coming with a higher bid, it's looking like a significantly higher bid. I mean, when you look at, right now, the offer on the table from Disney, $52 billion -- is it all stock, or is it stock and cash?
Argersinger: I think it's a combination, but a lot of stock.
Hill: A lot of stock, but the number is $52 billion. The reported number a month ago on Comcast was $60 billion. Now, if we assume it's going to be a little bit higher, I mean, at a minimum, it's going to come in $10 billion higher.
Argersinger: Right, and it's likely to be an all-cash deal. If you're a fiduciary at Fox, I think you have a duty to strongly consider Comcast's bid and see what else Disney's willing to do. I think, if they just blindly rejected that and went with Disney's bid, I think there'd be some problems there.
Hill: I think there absolutely would be some problems there. We are just hours away from the official start of FIFA World Cup 2018. But, the news today, at least in this office and probably other offices across America, is about World Cup 2026, which will be here in North America.
Argersinger: I'm excited.
Hill: Can I buy shares of "Matt Argersinger will be attending at least one, if not multiple games, regardless of where they are?"
Argersinger: Go big, buy call options on that and everything. That's a certain win, for sure.
Hill: [laughs] I like that this is all of North America. This is a joint bid among Canada, Mexico, and the United States. Also interesting to me, I was reading earlier today that there were cities, at least in the United States and presumably in the other countries, that said, "No, we don't want to be a part of this." I guess Chicago was one of the cities that said, "No, we don't want to be involved."
So, there's something like 23, 26 cities spread out across North America that are part of this official bid. Happily for you, both Boston and Washington D.C. are on that list. I mean, we'll just stay with Fox for a moment. This is not one of the assets that's up for sale, because Fox is keeping Fox Sports -- [laughs] it's a good day for Fox.
Argersinger: Yeah, all around. All around.
Hill: They have the shares up 10% because of what's going to be a higher bid from Comcast coming in at some point, and they have the broadcast rights through 2026.
Argersinger: And this has to feel good, because it was such a hit to them when the U.S. failed to qualify several months ago.
Hill: Yes. For 2018.
Argersinger: Right, for this World Cup. And that's the beauty -- if you host a World Cup, you're given a free pass in, so there won't be any qualification for the U.S. for 2026. I assume that works for Mexico and Canada, too. I assume all three hosts are going to get in. That's usually how it works. But, I don't think we've ever had a three-country host of the World Cup before. I don't know how that works.
Hill: By the way, is there a lot of danger that Mexico isn't going to qualify for the World Cup?
Argersinger: No.
Hill: Aren't they one of the typical --
Argersinger: From our region, yeah, they usually get in. So do we, usually. Of course, not this go around. But Canada ... gosh, they might have been to one World Cup in the last 20 years. I mean, I might be making that up, but I think that's about right.
But, yeah, it has to feel good. They have the rights. I think soccer in general -- or football, as they call it around the world -- is gaining a lot of traction in the U.S., as the demographics change in the U.S. The popularity of the sport, more Americans than ever are watching the European leagues, the Premier League, the Champions League, which is the cross-European Club Championship. I just think it keeps growing here in the U.S. That's going to be a great tournament, and a very valuable property for Fox to have for the next three World Cups.
Hill: Didn't Amazon just secure some broadcast rights for --
Argersinger: For the Premiership, that's correct. They're showing some Premier League games in the upcoming season.
Hill: Are you planning to be in the office during the World Cup? I was happy to get you in the studio today. And, I shouldn't put this on you. It's not like you're the only soccer fan in this office.
Argersinger: No, no.
Hill: And obviously, our company is very good. It never fails to make me smile, every March, there are stories written about the lost productivity in the United States because of the NCAA basketball tournament and people watching during the day, that sort of thing. Our company totally leans into that. We have flat screen TVs all over the office that have the games on, and people are scheduling meetings in conference rooms while games are going on so they can have one eye on the meeting and one eye on the game. So, I'm assuming we're going to have the games on here.
Argersinger: I think so. The nice thing is -- well, maybe it's not nice if you're the average employer out there, but -- most of the games, because of our time zone, are going to be taking place between early in the morning until early afternoon here. [laughs] So, it's really the work hours. But, yeah, my DVR is going to be working overdrive. For some of the games, I'm going to try to tape them and somehow not pay attention to my screen or Twitter or whatever, and try to get home and watch some. But, yeah, I'm going to find time during the day to watch. I can't help it.
Hill: For the novice viewer like myself -- I know about the powerhouse teams, I know Germany is one of the favorites, I think Brazil is another favorite --
Argersinger: Yeah. Spain is up there.
Hill: Is there an underdog team? Wasn't it four years ago that Iceland made -- they beat Great Britain, and they made it to the final four, or maybe the final eight, but it was just one of those things where, there are 300,000 people who live in Iceland, and 30,000 people from Iceland were at the game, I think, where they beat Great Britain. So, it's like, wow, 10% of the country is at this game.
Argersinger: Yeah. That was the European Cup.
Hill: European Cup, OK.
Argersinger: Still, Iceland came out of nowhere. And they're in this World Cup. Who knows whether or not they get anywhere. But, I think, one team, like, Cristiano Ronaldo, best player in the world, right there with Messi, he plays for Portugal. Portugal has never had a great overall team, they've never had a great overall finish in the World Cup. So, I would say, that might be a dark horse team, if Cristiano plays really well.
There's also Egypt, which rarely, rarely makes the World Cup. They have Mo Salah, who's probably one of the best players in the world, as well, certainly top five. He plays for Liverpool, he's leading that team. Maybe they can make some noise. Probably not, because it's going to be really hard.
But, those are some teams that, it might be fun to watch, to see if they can break out of the early rounds, make it to the knockout stages.
Hill: The whole thing about Iceland and 10% of the country attending the game, that was my second favorite stat coming out of that tournament. My favorite was that the coach of Iceland's team was a dentist.
Argersinger: [laughs] Yes, I know. It's fantastic!
Hill: It was basically like, "I'm kind of busy with my dental practice." "Well, we need someone to coach the team!"
Argersinger: "I'll take a few weeks off."
Hill: "How much time is this going to take? Alright." Matt Argersinger, thanks for being here!
Argersinger: Thanks, Chris!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Austin Morgan. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN and Walt Disney. Matthew Argersinger owns shares of AMZN, Netflix, TWTR, and Walt Disney and has the following options: long January 2019 $15 calls on TWTR. The Motley Fool owns shares of and recommends AMZN, Netflix, TWTR, and Walt Disney. The Motley Fool owns shares of VZ. The Motley Fool recommends TMUS. The Motley Fool has a disclosure policy.
