Disney / Marvel Deal Bad for 'House of Mouse' - Citibank

It's safe to say when Walt Disney Co. (DIS) announced its purchase of Marvel Entertainment Inc. (MVL) and its 5,000-strong character stable for $50 a share earlier this week it was going after Captain America of the Avengers and not, say, Captain Britain of Team Excalibur.

Now, before all the Captain Britain fans get up in arms (you know who you are) the fact that Marvel's top brands -- Spider-Man and the X-Men -- are already spoken for is just one of several reasons why, for Citi analyst Jason Bazinet, the deal will be a bad one for the House of Mouse.

"This deal looks smart on paper, but over the long run we suspect this will be viewed as [Robert] Iger's first major mistake as CEO," Mr. Bazinet said in a note to clients.

Strategically, it certainly makes sense. Disney has media properties that target just about every demographic except the 10- to 18-year-old male. Marvel fills that niche nicely, while also remaining relevant to the even more lucrative 18-49 male set.

However, Mr. Bazinet has issues with the price Disney paid. Considering Marvel itself has not aggressively repurchased shares when it traded above $27, he figures Marvel has pegged fair value for its stock at about $35. This means Disney has devalued its own shares by about $1.21-billion.

As well, both Time Warner (TWX) and Universal walked away from movie deals for Iron Man and the Hulk respectively in recent years, forcing Marvel to produce them on its own.

"The decision of other major studios to walk away from Marvel's lesser known characters casts a long shadow over this pending transaction," he said.

When it comes right down to it, Marvel just has too many of its lucrative properties tied up.

Toy rights are stuck with Hasbro (HAS) until 2017, Paramount has a film distribution deal for the next five movies, while Universal Parks has long-term licences for Marvel theme park rides east of the Mississippi River. This of course presents a problem as Disney World is in Florida.

And when it comes to Spidey, Sony (SNE) has indefinite rights to the character as long as they keep making movies (and one can't imagine they wouldn't) while News Corp (NWS), the parent company of Fox, has the same rights to Wolverine and the X-Men.

"That means Disney will have to pick over what's left," he said. And considering the pickings get pretty slim after Captain America, Thor and the rest of the erstwhile Avengers (Mr. Bazinet is none too impressed with their bankability either) this does not bode well for the success of any future Captain Britain flick.

Citi lowers its 2010 forecast for earnings per share on Disney to $1.82 from $1.89 while maintaining a Sell rating and $25 target price.

Mr. Bazinet also raises Marvel to Hold from Sell with a price target of $50, up from $31.

(Apologies to Captain Britain)

Comments

[herbert hoover:]

LOL - this "advice" is brought to you by the same company that wanted to buy Wachovia.

Sep 06 02:17 PM

[twoeyes:]

Sure, Spider-Man and the X-Men might be tied up with deals... but these are most likely with some kind of shared revenue stream.

I can't imagine that Marvel would have signed a lump-sum indefinite deal with Sony. So, yes, Disney won't be able to make or market the future movies, but they'll still get some good royalty revenues from them.

Sep 06 07:02 PM

[waterman:]

Those who walked away from IronMan must have had lead in their pants.

I think this purchase is long term thinking - not 3 -5 year thinking.

Sep 07 09:23 AM

[skysan:]

I agree there are terms of the deal that makes Disney money. Why would you buy toys for someone else and then wait to play with the toys after they are worn out? Disney can also serve up a deal to have the characters running around the theme parks to generate interest in new movies.

Sep 07 10:37 AM

[johnnysize:]

Yeah- I'm sure DIS is buying MVL so they can pick over the slim leftovers. Dude, this aint a softball game.

Sep 09 01:23 PM