Why Disney Made A Great Choice Buying 'Star Wars'

| About: The Walt (DIS)

Walt Disney (NYSE:DIS) has announced that they're in proceedings to purchase Lucasfilm LTD from the sole owner and chairman George Lucas. The price? Roughly $4 billion in cash and stock, give or take some. Not a bad haul for George Lucas, though whether it's cheap or expensive depends substantially on what Disney does going forward -- but it's probably going to be great, given Disney's history.

When you look at the economics and the long-term potential, this looks like there will be quite a bit of upside for Disney, assuming they don't have a series of complete flops like a "John Carter" meltdown. The chances of that kind of a meltdown are unlikely, however.

Regardless, Lucasfilm LTD already pulls in around $200 million a year in products and licensing, according to the press release by Disney. If this is true, that gives an extremely comfortable safety net even if the Disney versions of Lucas films are just modest.

The Economics: Strong For Disney

In the end, the cost was roughly $4 billion, give or take. The income potential is huge, but we're not out of the woods yet, and a big flop like John Carter could set the entire investment back a decade or more.

I bring up the Carter movie because it was a flop that barely broke even, and the time and human resources cost made it even worse. Building an epic movie is tough, and it's even tougher when you have an entire world of Star Wars fans watching your every move.

If, however, they just do what they did with Marvel, then this could be a wonderful investment. Considering just a couple of years after acquiring Marvel they grossed over $1 billion with The Avengers, Disney has shown that they know just how to acquire a great brand and further the tradition without "screwing it up". Add in other acquisitions like Pixar, and there's a wonderful history for investors to factor into account.

As far as Star Wars itself, in 2005, the last Star Wars movie (Revenge of the Sith) raked in less than half of a billion ($452 million), domestic alone. The later Star Wars related movie (Clone Wars) made much less, a paltry $68 million, gross domestic. That's only the returns from movie sales, however, and doesn't account for all of the other income streams that come with owning a brand like Star Wars. It's also about half of the picture - worldwide grossing is roughly double, because of the huge international following.

Considering Disney is planning more than just a handful of new Star Wars movies, the long-term income of this is incredibly strong.

And that's just Star Wars. The purchase also includes other films, like Indiana Jones, though there's no word yet if they're planning on releasing another movie attached to that movie brand. If so, it could certainly push the sale price from modestly favorable to a steal. The last Indiana Jones movie grossed $700+ million, worldwide.

Movie sales aren't, of course, the only profits owning Lucasfilm LTD can provide. DVD sales, licensing, merchandise, etc. There's no shortage of income potential. As stated earlier, Lucasfilm apparently is pulling in somewhere in the neighborhood of $200 million a year.

The Risks

The risks are pretty straightforward. The entire grossing of all of the Star Wars movies so far was about $4 billion, inflation adjusted. The chances of Disney being able to re-create that growth with Star Wars alone isn't certain at all. This means the business move is more about already-existent income streams from Lucasfilm, other movie brands, and the licensing that happens when a new epic film comes out.

While it's impossible to know for sure what the impact will be, the chances of having losses like John Carter are remote, the chances that many people will watch the movie just to see it is a given, and from a purely economic perspective, this was a great move on Disney's part.

Either way, Disney is still a $90 billion company, and unless this move is pure gold, the impact to the stock should be modest, but positive.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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