Walt Disney - Acquisition Of Star Wars Is An Excellent Addition

| About: The Walt (DIS)

The Walt Disney Company (DIS) announced on Tuesday that it will acquire Lucasfilm, the entertainment firm known from Star Wars. Walt Disney will pay approximately $4.05 billion in cash and shares for the firm. Shareholders in Walt Disney get the chance to react on the announcement of the deal on Wednesday morning.

The Deal

Walt Disney announced that it will acquire Lucasfilm, currently owned by founder George Lucas. Disney will pay approximately $4.05 billion for the firm. The company will pay approximately half of the amount in cash, and the remainder by issuing 40 million shares.

CEO and Chairman Robert A. Iger commented on the deal, "Lucasfilm reflects the extraordinary passion, vision and storytelling of its founder, George Lucas. This transaction combines a world-class portfolio of content including Star Wars, one of the greatest family entertainment franchises of all time, with Disney's unique and unparalleled creativity across multiple platforms, business, and markets to generate sustained growth and drive significant long-term value."

The valuation of Lucasfilm is almost entirely driven by the Star Wars franchise. The companies did not provide financial details for the annual year of 2011. Disney stressed that in 2005, when the most recent Star Wars film Revenge of the Sith was released, the firm reported operating income of $550 million. Annaul revenues from Lucasfilm's consumer products is expected to come in around $200 million.

Walt Disney made a conservative approach in the valuation, including erosion of the home entertainment market.

The deal is expected to be dilutive to 2013's and 2014's annual earnings. The deal is expected to be accretive to 2015's earnings per share. In 2015, the next Star Wars film is planned for release.

The board of directors of both companies have already approved the transaction. Completion of the deal is subject to customary closing conditions and anti-trust approval.


Walt Disney ended its third quarter of its fiscal 2013 with $4.4 billion in cash and equivalents. The company operates with $15.0 billion in short and long-term debt, for a net debt position of $10.6 billion. Financing of the deal, for 50% in cash, should be possible within existing means. The company is scheduled to report its fourth quarter results on the 8th of November.

For the first nine months of its fiscal 2012, Walt Disney generated revenues of $31.5 billion. Net profits came in at $4.8 billion, or $2.44 per diluted share. For the full year of 2012, the company could report annual revenues of $42 billion. Net profits could come in around $6 billion, or $3.30 per diluted share.

Shares are currently valued at $90 billion. This values the company at 2.1 times annual revenues and 15 times annual earnings.

Disney pays an annual dividend yield of $0.60 per share, for an annual dividend yield of 1.2%.

Investment Thesis

Year to date, shares of Walt Disney have risen some 33%. Shares gradually rose from $37 in January and peaked at $53 in September, on the back of strong operating results. Shares fell back slightly and are currently exchanging hands at $50 per share.

Over the past five years, shares of Walt Disney have risen almost 50%. Shares hit lows of $15 in the beginning of 2009 during the financial crisis. Shares recovered and are trading at all time-highs at the moment. Annual revenues rose from $37.8 billion in 2008, to an expected $42 billion this year. Net income rose from $4.4 billion to an expected $6 billion this year.

The deal is an excellent addition. Walt Disney's track record regarding acquisitions has been very good. The deal with Marvel has been an excellent deal for Walt Disney, given the $1.5 billion proceeds from Avengers earlier this year. Movies produced by Pixar, have been a box office success as well.

Annual revenues from Lucasfilm total some $200 million per annum. This is entirely based on revenues from previous movies. These are predictable cash flows, and Disney has the ability to boost those revenues in combination with its own operations. Besides Star Wars, the acquisition furthermore includes films like Indiana Jones.

The deal is rather small, but is a net positive. Walt Disney trades at just 15 times annual earnings, and it has acquired yet another long term valuable asset. Cash flows from Star Wars are stable and predictable for the long term.

Shares of Walt Disney continue to entertain your long term investment portfolio.

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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