Star Wars: Will The Force Be With Disney?

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Three of my all-time favorite movies were from the Star Wars saga. "Star Wars" (1977), "The Empire Strikes Back" (1980) and "Return of The Jedi" (1983) told the tale of an interstellar rebellion and its aftermath, which took place "long, long ago" in a "galaxy far, far away."

It was announced recently that the creative force behind those iconic movies, George Lucas, is selling his production company, LucasFilm, to Walt Disney Co. (NYSE: DIS) for $2 billion in cash and $2 billion in stock. The move won't pay off for Disney until at least 2015, when they start including earnings from the acquisition in their bottom line . 

Will it be a win-win situation for both sides?

Mr. Lucas can turn over day to day operation of the business to Disney so he can concentrate on his philanthropy and charitable work. And he could benefit financially if the deal is completed before the end of the year, as he will avoid higher taxes that might occur as the result of expiration of the Bush-era rates.

If we use history as a guide, Disney will probably benefit from this deal. The six original movies and six special productions and reissues released so far have grossed nearly $4.5 billion worldwide (unadjusted for inflation). And there has been tons of additional profit generated by licensing rights to toys and games related to the Star Wars theme. A 7th movie is planned to be released in 2015, according to some people with knowledge of the situation. Thirty-eight years between the first and most recent movie in a series would be quite an accomplishment. 

Disney has experience with large scale acquisitions. They bought Capital Cities/ABC in 1995 for $19 billion, Pixar in 2004 for $7.4 billion, and Marvel in 2009 for $4.2 billion. That has contributed to consistent, although somewhat unspectacular, earnings growth averaging about 8% a year. A relatively low long term debt ratio won't increase much with the planned purchase. The stock has been somewhat unspectacular as well, only averaging a gain of about 5% a year since the ABC acquisition, although it has picked up somewhat recently.

Could Mr. Lucas have sold his life work to anyone besides Disney?

News Corp. (NASDAQ: NWS) already had a relationship with LucasFilm. It owns Fox, which distributed all of the Star Wars movies, and may have been interested in LucasFilm to add the creative and production sides to the business of making the future films in the series.

However, the relationship was tenuous at best and the "phone hacking" scandal involving U.K. operations of News Corp. and a relatively high cost structure at Fox may have doomed any chance of doing a deal. News Corp. probably could have used the extra income, as it has been suffering through declining earnings growth and stock performance over the last few years. 

Would LucasFilm have fit in with Time Warner (NYSE: TWX)? Would it provide content for the Cartoon Network, CNN or HBO? Doubtful. A combination of Bugs Bunny and Darth Vader instead of Mickey and Princess Leia doesn't sound nearly as profitable.

In the past Time Warner has shown it is more of a seller rather than a buyer. Over the years it has sold off various entires, such as World Championship Wresting, its stake in Comedy Central, and the Atlanta Braves baseball team.

Time Warner's earnings have been relatively flat over the last few years and the stock price has gone nowhere. And maybe it was limited in what it could do because of a relatively high debt level. 

So over the next few years when you go to the movies will you hear Mickey Mouse say to Minnie, "May the force be with you" or Luke Skywalker brandishing a pirate sword instead of a light saber? 

 





Mathman6577 has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney and Time Warner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure