Now that Walt Disney Co.’s shareholders have voted to approve the company’s bid to buy 21st Century Fox Inc.’s entertainment assets, all eyes and ears will be on how it plans to absorb and integrate those assets.
Disney DIS, +0.69% which will announce fiscal third-quarter earnings Tuesday after the market close, will acquire the Twentieth Century Fox TV FOXA, +0.24% and film studios, cable networks including FX and National Geographic Channel, Star India, a 39% stake in British pay-TV giant Sky PLC and majority control of streaming service Hulu in the deal.
Investors will also want to know what Disney management says about the other 61% of Sky. Fox and Comcast Corp. CMCSA, -0.14% both have their eye on the pay-TV company. Fox made an offer last month for Sky of 14 pounds per share, which Comcast later topped with a bid of 14.75 pounds per share. If Fox increases its bid—which Disney would have to agree to—and wins, Disney would inherit the remaining 61% of Sky through its acquisition of Fox’s entertainment assets.
The Fox acquisitions are part of Disney’s long-term plan to break into streaming as consumers leave cable and go to video streaming, analysts say. “Disney is building content assets that enable it to take advantage of the significant OTT opportunity ahead,” wrote analysts at Morgan Stanley, led by Benjamin Swinburne. OTT refers to “over-the-top,” a term often used to describe streaming platforms such as Netflix.
“We believe Disney will leverage its popular brands to make continued investments in original films and TV series for the streaming service, with the potential opportunity to leverage Fox’s production assets and intellectual property in building a larger streaming content library,” Swinburne wrote.
Investors will want to know how ESPN+, Disney’s first subscription streaming product that rolled out in April, is doing, as they wait for the 2019 launch of the company’s broader streaming service. Although a price has not yet been announced, Disney said last year that the service would be “substantially cheaper” than a subscription with rival Netflix, Inc. NFLX, +0.01% whose monthly plans run from $7.99 to $13.99.
Investors will be looking for further details related to the recent New York Times report on Disney’s plans for the streaming service. The Times article said Disney will be spending an estimated $100 million on a 10-episode “Star Wars” series for the family-oriented service. The service will also feature other new series, including spinoffs of “High School Musical” and Pixar’s “Monsters Inc.,” Marvel shows, a possible Muppets series and a new season of the animated “Star Wars: Clone Wars.” Disney told the Times most of the series would cost around $25 million to $35 million to produce.
The entertainment giant is also planning on at least nine new movies for the service, including live-action adaptations of “Lady and the Tramp” and “The Sword in the Stone,” as well as a remake of the 1980s comedy “Three Men and a Baby,” according to the Times. “Disneyflix,” as some in Hollywood are calling the service, will rely heavily on Disney’s catalog of movies and more than 5,000 episodes of older Disney TV shows.
Disney’s entrance into the streaming world cuts two ways: Swinburne said that while future subscriber growth could drive global revenue, acceleration in pay-TV cord-cutting was still a risk to the company, given Disney’s exposure to pay-TV revenues through its cable and broadcast properties.
Earnings: Analysts polled by FactSet are expecting, on average, Disney to post earnings of $1.95 a share, a 23% increase from the third quarter of 2017.
Estimize, which crowdsources estimates from buy-side and sell-side analysts, fund managers, academics and others, is expecting EPS of $2.00 per share.
Disney beat earnings expectations the past two quarters, and has beat in 7 of the past 10 quarters.
Revenue: Analysts expect Disney to report revenue of $15.35 billion, according to FactSet, an increase of 7.8% from a year ago. Estimize is expecting revenue to come in at $15.56 billion.
Disney’s media networks, which include the company’s cable and broadcast properties such as ESPN and ABC, are expected to bring in $6.10 billion. Disney’s theme parks and resorts are expected to contribute $5.28 billion, while its studio division is expected to add $2.89 billion. Disney’s consumer products division is expected to bring in $1.11 billion.
Disney beat revenue expectations in the previous second quarter, but missed expectations for the previous six.
Share price: Disney shares have gained 8.3% so far this year to a near three-year high in morning trade Tuesday, while the S&P 500 SPX, +0.41% has gained 7.0%. The Dow Jones Industrial Average DJIA, +0.68% of which Disney is a component, has gained 3.8%.
The stock has declined on the day after the past two quarterly reports, and after four of the past five reports.
Of the 25 analysts who cover Disney on FactSet, 12 rate the stock the equivalent of buy, 12 are at the equivalent of hold and 1 is at the equivalent of sell. The average price target is $116.64, which is 0.1% above current levels.