On October 30, 2012, Walt Disney (DIS) announced that it has acquired the legendary Star Wars series, the Indiana Jones franchise, and a number of other assets from George Lucas for $4.05 billion. This deal is likely to have a negative effect for one or more of the following reasons. First, Star Wars is a franchise that is well known around the world but is losing its appeal. Catching this falling knife is something even the Genie from Aladdin may not enjoy. Second, it turns Disney more into a serial acquirer than an original creator and this is the easiest but least rewarding road. Third, for $4 billion it seems that Disney could have bought a lot more promising assets.
Star Wars Decline
The Star Wars franchise is still strong, but mostly in the United States. There is a plethora of books, computer games, and toys based on the movie characters. However, the main revenue source, the movie, has been in decline. From the table below, it is obvious that the first movie was the most successful one, with a production budget of $11,000,000 and worldwide box office revenues of $798 million, according to the-numbers.com. Also, remember this is in 1977 dollars.
Star Wars Ep. IV: A New Hope
Star Wars Ep. V: The Empire Strikes Back
Star Wars Ep. VI: Return of the Jedi
Star Wars Ep. I: The Phantom Menace
Star Wars Ep. II: Attack of the Clones
Star Wars Ep. III: Revenge of the Sith
In the past few years, a few other science fiction movies have made good progress. For example, Avatar had a budget of $246 million and generated $2.8 billion in global receipts, District 9 was made on a $30 million budget in 2009 and generated $210 million, and Inception, launched in 2010, cost about $160 million and generated over $800 million. And from 1999 through 2003, the Matrix films cost about $300 million while generating $1.6 billion in sales. Clearly, Star Wars is one of the best but not a clear winner in the science fiction genre. More revealing, revenues of the first Star Wars movie were 72 times the budget, while the latest Star Wars brought in revenues of 7 times the budget for Lucasfilm.
Disney's Buying Spree
Walt Disney is perhaps the most aggressive media company in terms of acquisitions. When Walt and Roy Disney started the company in 1923, Walt was the major creator while Roy made the financing decisions. In fact, the company did not make a significant acquisition until the 1990s with the 1993 acquisition of Miramax Films. This was followed by an acquisition of ABC (that included ESPN) in 1995, followed by Pixar in 2007, and Marvel Entertainment in 2009.
In fact, the Marvel Entertainment acquisition in 2009 for $4.24 billion could be comparable to the Star Wars buy. However, the similarities end with the purchase price. Marvel Entertainment had a much larger footprint in terms of characters and businesses related to these characters, including comics, toys, and computer games. Star Wars is the highest price Disney has paid for content so far. It seems that Disney, during the past two decades, has been successful mostly because it has been able to amass content. It has become more of a financing and holding company than an art and creative company. If this is the case, investors should ask themselves if it is better to invest in Disney or smaller media companies.
Why Star Wars
There are a number of public companies that have a larger library and could be bought for the same amount. Lions Gate Entertainment (LGF) is among the companies that Disney could have considered if it wanted to blow $4 billion on content. Lions Gate has a market capitalization of $2.1 billion and an enterprise value of $3.5 billion. Assuming a 30% premium, Disney could have bought it for $2.8 billion and assumed net debt of $1.4 billion for a price tag of $4.2 billion. Lions Gate has such movie titles as The Hunger Games, The Twilight Saga, The Expendables, and Conan the Barbarian and the TV series Mad Men. In addition, Lions Gate generated revenues of $1.6 billion for its fiscal year ending March 30, 2012. This is significantly more than the estimated 2012 licensing revenues generated by Lucasfilm of $215 million.
Another company that could have sold its movie business is Sony (SNE). Sony has a market capitalization of $9.9 billion and an enterprise value of $20.7 billion. Sony is a struggling company right now due to problems with its electronics division and now might be a good time for the company to sell some of its assets. Sony Pictures Entertainment, the movie and TV business of Sony, generated $8 billion of revenues and $416 million of operating profit in fiscal 2012. Sony as a whole had about $8.2 billion in revenues or about 10% of the company's revenue. Sony Pictures include such titles as Spider Man, Stuart-Little, Ghostbusters, and Men in Black. While Sony Pictures Entertainment is perhaps the most valuable asset of Sony, a sale of its movies and TV business to Disney could have been beneficial to both.
Another company that comes to mind is DreamWorks Animation SKG (DWA). The company is run by a former Disney CEO, Jeffrey Katzenberg, and its movie roster includes Madagascar, Shrek, and Kung-Fu Panda. It is also developing entertainment parks in China (Oriental DreamWorks) and has a licensing business. The company had 2011 revenues of $706 million and earnings of $87 million but it should perform better in 2013. The company will start 2013 under a new distribution agreement with Twentieth Century Fox, a division of News Corp. (NWS), and will be releasing three new movies next year (The Croods, Turbo, and Mr. Peabody & Sherman). Also, last year DreamWorks Animation acquired the rights to make a movie based on the popular Captain Underpants books. Currently, DreamWorks Animation has a market capitalization of under $2 billion.
Without a doubt, there will be plenty of synergy opportunities with the acquisition of Lucasfilm. Star Wars is already in Disney's parks and it is possible consumers will watch Star Wars on ABC networks, Disney channel, and perhaps be able to take a Star Wars ship on Disney cruise lines. Even a light saber competition could be in the making for ESPN. However, it seems that Disney has overpaid for a declining franchise and it could have bought much better assets or even invested the money and energy to create its own movies. George Lucas and Lucasfilm will be well served from this deal. Their legacy will be preserved by Disney, however, this might prove risky and expensive for Disney shareholders.