Mickey Mouse Buys Spider-Man
When Walt Disney Co. (NYSE: DIS) made the deal to purchase Marvel Entertainment (NYSE: MVL) for $4 billion in stock and cash, it was automatically assumed that Disney had made another good move and that Marvel would be assimilated into the world of Disney properties without much trouble. But as investors looked at the deal, at least some questions arose.
Oh What A Deal?
First, the deal price would pay a premium of what amounted to $51 a share, cash and stock for Marvel, which traded at roughly $38 a share at the time of the announcement. Second, despite the blush of Disney being able to add the Marvel pantheon of super-heroes to its stable of properties, it’s known that many of Marvel’s top franchises such as Spider-Man and The Fantastic Four are tied up in exclusive movie and licensing agreements. After all, Disney is buying Marvel for its properties so it can extract the future cash flows from the properties while expanding the marketing and sales of those properties, so the concern is that this might cap upside revenues. Third, there is the question of culture. Mickey Mouse merging with the Hulk, some would say. This could make for less than smooth creative operations.The happy-land of Disney melded with the sometimes dark, edgy world of the Marvel Universe of comic book super-heroes like Hulk, Spider-Man and the like, might make for an uneasy marriage. Marvel has a vastly different creative culture which is their comic book and studio business. Fourth, Disney is buying into a stagnant industry in the comic book segment of Marvel, which it gets along with its more attractive business, Marvel Studios and the 5,000 properties and characters originally created in the comics. So, there are some potential problems with fusing Marvel into becoming a part of Disney.
An Analyst’s Take
Drew Crum, analyst at Stifel Nicolaus, feels these problems can be overcome. “We like the deal from both sides, for both companies,” he said. For Marvel, “it’s an opportunity taken to sell itself to a larger media company,” which as he pointed out was always regarded as a long-term goal for the company, and of course in Disney, Marvel is ending up in the arms of a potent partner. The share price premium that Disney is paying will be judged in the future on the value that Marvel can add to Disney’s revenues and earnings, but what Marvel is getting is “Disney’s marketing muscle,” as Crum points out. With Disney’s historic record in licensing and selling entertainment related consumer products, given the vigorous push it makes in all its areas, this is something Marvel could never come close to on its own. As for Disney, they gain entry into the teen male demographic, for them an area not only underserviced, but “something they haven’t had,” Crum says.
As for the exclusive tie-ups or perpetual licenses Marvel has with Sony and Fox regarding Spider-Man and other major properties that might limit revenue, Crum points out that Marvel Studios has “sagely taken even better care in house of the Marvel properties” under their aegis. “The Spider-Man films were fairly good, but look what Marvel Studios did with Iron Man, a ‘B’ character—they knocked it out of the park, ” Crum says. On tap in the next couple of years is the Iron Man sequel, a Captain America movie and the Avengers film, so Marvel will continue to produce richly creative and potentially popular movie content.
As for the question of culture clash, Disney usually finds a way for disparate parts to at least get along, if not function harmoniousl. It ironed out its partnership with Pixar, while Disney’s Touchstone film division for example was created twenty years ago to widen Disney’s appeal to movie audience, and has historically produced far more diversified content than Disney did in the years before that. Maybe the ultimate fixup was Robert Iger’s succession of Michael Eisner as CEO in 2005 after Eisner’s reign ended with all kinds of difficulties. A key will be to allow the Marvel portion of Disney to retain its autonomy. A more pressing question might be the health of the studio business currently, as it has just seen a leadership change and produced 16% less revenue this year and has produced five straight quarters of declining revenues. Then again, this, at least in part, as in its parks and leisure division, is a function of the slumping economy, and the studio has some powerful sequels to popular movies in the pipeline.
The Comic Book Biz
With the comic book business, Crum said this will produce about “$125 to $135 million in revenue in fiscal ’09,” so although it is about one-quarter of Marvel’s revenue , it is not a huge factor in itself in the Disney deal. Still, as an October Reuters piece discussed, there are rumblings that Disney’s marketing strategy might attempt to expand the comic book distribution channel from the 2,000 direct market comic shops into additional mainstream outlets. It’s important to note, however, that comic book marketing has historically shifted out of the mainstream into niche marketing in the last three decades, so this would be a difficult move.
Disney Makes Things Work
Disney, in its latest quarterly earnings, was still able to grow both itsoverall revenue and earnings despite lagging segments in parks and leisure and the movie studios. Marvel, which didn’t have any major film releases, had lower earnings as expected. But as analyst Drew Crum indicated, the obstacles are minor or at least the problems look solvable on the merger front. The strong historic record of Disney making things work and adapting to changes, along with solving its problems in the past, has been a noteworthy track record . This is no small thing. Contrast this with other media companies, say, Time Warner (NYSE: TWX) for example, the media conglomerate whose parts don’t fit together, and whose execution is less than optimum.
Disney The Empire
Disney is the empire of choice right now in media and should continue to be so. It has an array of both classic and modern properties with its extensive movie library, continues to make movies,owns cable and broadcast television, has its amusement parks and is as strong if not iconic a brand as there is. If Marvel folds into Disney successfully, Marvel will not only find its niche in the Disney kingdom, but Disney may find yet untapped imaginative and creative ways to push the Marvel products into a new level, both creatively and financially. Ultimately, the strong roots of Disney and Marvel are creative ones, and with Disney’s midas touch on how to sell that creativity, we may be headed for a new age of Marvel and Disney both. Of their creators, the late Walt Disney for Mickey Mouse, and the group of Stan Lee along with Steve Ditko, and the late Jack Kirby for Marvel, one can only wonder—or marvel-- at what such modest yet profound creative beginnings have wrought. As analyst Drew Crum pointed out, it’s a good deal for both sides. Two once simple cartoon and comics companies, together as one will now rule the media entertainment world. For investors, this merger looks to the long-term future to lasting success.
Copyright © 2009 Greg Sushinsky. All Rights Reserved.