The Strategist

RBC: Apple-Disney deal could work out

04/14/2017 - 15:58

The presumable purchase could cost Apple unbelievable $ 200 billion. If the deal does take place, it will completely reverse the future of Silicon Valley and Hollywood, and that's why.

Is Apple going to buy Disney? Analysts are wondering whether this would happen, given that this would be a truly gigantic transaction worth hundreds of billions of dollars. Researchers at RBC Capital Markets believe that the merger of the most expensive high-tech company in the world and the almost a century-old media giant would cause a real storm in the technology and the entertainment industries. "The new company will be huge, and its financial capabilities will cause a revolution in services, as well as in the production of devices and content. If something is capable of frightening both Silicon Valley and Hollywood, then this is exactly such an association", they say in a note to investors. But where did these rumors come from, and how likely is such a deal? 

Theoretically, Apple has the money needed to buy Disney. The company's foreign accounts hold about $ 230 billion. They are waiting to be returned to the country, but now such an operation is fraught with huge losses due to taxes, so the corporation is waiting.

Yes, Apple has a lot of money, yet Disney is a very expensive company with a market capitalization of $ 237 billion. In addition, RBC analysts believe that Apple will have to pay 40% premium to the current value of the shares if the deal takes place. If the tech giant succeeds in repatriating $ 200 billion after the taxes are paid, then this amount will not be enough, and Apple will have to borrow. Currently, Apple’s most expensive purchase was music company Beats worth 2.2 billion dollars. In general, it will not be easy, but many people still think about this possibility.

Analysts say investors "often ask" if Apple is going to buy Disney. But why should Apple try to buy Disney? There are several possible reasons for this. 

•    To reduce dependence of the business on iPhone sales. Now they account for more than 60% of all income. This is a phenomenally successful product, but, after all, Apple is very dependent on the market situation.

•    To stimulate development of services. As the smartphones market is slowing, Apple is trying to develop other areas, and various services (including Apple Music) are very important for the company. Disney with its huge library of content and subscription-based media channels would have come in handy.

•    To compete with Netflix and Amazon on their field. By combining technology expertise with the content library and experience in its production, the company could become a significant player in the market of streaming.

•    To bring a direct financial benefit to Apple's shareholders. Analysts at RBC have calculated that earnings per share will increase by 18% in the event of acquisition of Disney,.

•    Finally, the two companies have something in common. Steve Jobs, the late leader of Apple, was also the largest shareholder in the animation studio Pixar, which is now part of Disney.

Apparently, RBC’s research has been provoked by rumors and questions from investors, rather than insider information or evidence of negotiations between companies. Analysts admit that "the chances are small, yet they are above zero". Talks about the possible deal have been heard for many years. Back in 2016, John Malone, who worked for many years on American cable television, said that if ESPN sports channels were separated from Disney, the rest might be of interest to Apple. 

The RBC writes: "If the deal ever happens, it will be a huge event, and the resulting organization will become an unprecedented player in the production and distribution of content with a huge potential for creating a competitive streaming video service. The company will have enormous technical and financial capabilities that can be used to acquire and protect the rights to content. We should also expect the integration of Apple technologies into amusement parks and consumer products produced by Disney".