The Disney Empire Now Has The Force

| About: The Walt (DIS)

On October 30, Walt Disney Co. (NYSE:DIS) announced that it is acquiring Lucasfilm Ltd. for $4.05 billion from George Lucas, the sole owner of his namesake production company. This deal will bring with it the Star Wars and Indiana Jones franchises, which are two of the most successful movie franchises in filmmaking history. Disney also announced that a third trilogy of Star Wars movies shall be made, with the first of the three movies, an Episode VII, scheduled to be released in 2015. Lucas will be a creative consultant on the new Star Wars films. This news should be positive for both Disney investors and Star Wars fans.

This is the newest step in a continued effort by Robert Iger, Disney's Chief Executive Officer, to add premium franchises to its arsenal of entertainment products. If you were after premium content, you would be hard pressed to find a franchise more premium than Star Wars. The Star Wars films have generated over $4 billion in worldwide ticket sales.

These sales numbers only include theatre ticket sales, and not merchandising, with the Star Wars franchise estimated to have generated $27 billion in total franchise revenue, according to Statistic Brain. That total includes approximately $12 billion in toy sales, $3.75 billion in home movie sales and $2.9 billion in video game revenue. It is also estimated that the franchise generated $1.5 billion in toy and game revenue in 2011 alone.

Moreover, given the prior deals Disney has made in its recent effort to acquire premium franchises, it would appear Disney purchased Lucasfilm at a fair price. In 2006, Disney paid $7 billion for animation studio Pixar, adding Toy Story and Cars. Then in 2009, Disney acquired Marvel Entertainment for $4.2 billion, adding The Avengers and many other remnants of Marvel's original arsenal of characters and content to Disney's library.

Some of Marvel's content had already been sold off in piecemeal form, with Sony's (NYSE:SNE) Columbia Pictures owning the Spider-Man and Ghost Rider franchises, and News Corp's (NASDAQ:NWS) and (NASDAQ:NWSA) Fox owning X-Men and Fantastic Four, among others. Marvel actually had to reacquire some characters before selling to Disney, including The Incredible Hulk and Iron Man, and even The Avengers. Further, Disney must pay Viacom's (NYSE:VIA) Paramount an approximately 8% royalty on The Avengers. Marvel's The Avengers, Disney's first related film following that acquisition, generated over $1.51 billion in worldwide ticket sales this year, making it Disney's highest grossing film and the third highest grossing film ever made.

Pixar was majority owned by Apple (NASDAQ:AAPL) Co-founder Steve Jobs, and the deal gave Mr. Jobs a 7.4% stake in Disney, and the trust that now holds those shares is the largest Disney shareholder. With the Lucasfilm deal, George Lucas is the sole owner, and Disney will be paying approximately half of the consideration in cash and issuing approximately 40 million shares, which will make Lucas the second-largest non-institutional shareholder in Disney, with an approximately 2.2% stake in the company. Over the next two years, Disney plans to repurchase an amount of shares equal to the approximately 40 million issued to Lucas.

All of these deals show the importance these movie studios are placing on this type of content, which is broadly appealing, including to both children and adults. Moreover, such content is particularly suitable for both merchandising and theme park applications, both of which are important to Disney. Lucasfilm and Disney had previously collaborated to create Star Wars and Indiana Jones attractions for Disney's Parks and Resorts, and it should be expected that more such attractions will be forthcoming.

Disney indicated that it has no plans to develop Lucasfilm content other than Star Wars, but plans may change. Kathleen Kennedy, the current co-chairman of Lucasfilm, will become president of Lucasfilm and report to Walt Disney Studios Chairman Alan Horn. Kennedy co-founded Amblin Entertainment with Steven Spielberg and produced some of Spielberg's movies, including E.T.: The Extra-Terrestrial and Jurassic Park (and actually produced all three movies in the Jurassic Park franchise). Kennedy has only been the co-chair of Lucasfilm since June of this year, indicating she was hired and appointed in anticipation of this sale to Disney.

Beyond film franchises, this acquisition also brings with it LucasArts, its video-game division and Industrial Light & Magic, the studio that developed the proprietary and groundbreaking special effects within the Star Wars movies. According to Disney, this year, Lucasfilm will generate 25% of its revenue from its film library and about another quarter from product licensing. LucasArts and Industrial Light & Magic make the rest of the revenue, indicating that these divisions are nothing to sneeze at.

All in all, this deal appears highly sensible for Disney, which is acquiring not only one of the most successful movie franchises of all time, but also these special effects and video game making studios that could potentially replace its own already existing endeavors in these fields, similarly to how Pixar replaced Disney's in-house computer-generated animation department. LucasArts may be a sensible division for developing all sorts of new games, or may simply be integrated with Disney Interactive Studios. Similarly, the addition of Industrial Light & Magic and its proprietary bag of tricks should help Disney enhance the visual appeal of a great many future films.

This may be the last large deal Iger makes at Disney, or at least the last one for a while, as it may be difficult for him to follow-up this deal with anything that will seem as epic. Though Lucasfilm is costing $4.05 billion, it should start producing revenue for Disney immediately and is believed to have generated $1.5 billion in revenue last year. Moreover, the potential for the next Star Wars film to generate over one billion dollars in worldwide theatre sales alone appears highly probable, not to mention the related video game, toy, DVD and other sales that have the potential to generate even more revenue than the movie will make in theatres. The force is now with the house of mouse, and that is quite an empire.

Disclosure: I am long SNE. 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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