Disney Steals Lucasfilm - We Like The Deal

| About: The Walt (DIS)

Tuesday afternoon, entertainment giant Disney (NYSE:DIS) purchased Lucasfilms and all associated assets from legendary film maker George Lucas for $4.05 billion-half in cash, half in 40 million newly minted shares of Disney stock. We can't imagine the deal was anything but a steal for Disney, which now owns Lucas' catalog of films, which includes six Star Wars movies, as well as the Indiana Jones franchise. Disney also acquires all licensing revenue, which amounts to over $200 million in 2012 alone. This doesn't even account for successful businesses Skywalker Sound, LucasArts (video games), and Industrial Light & Magic.

Though video games might not look very strong give the failure of EA's (NASDAQ:EA) Knights of the Republic, we're confident about Disney's ability to monetize every division. More importantly, Lucas announced that Disney will make new Star Wars films, starting with Episode VII and moving on thereafter. While he didn't say it, Disney announced that new films will be released every few years alas Batman or James Bond-domestic box office revenue should total at least $500 million for Episode VII and beyond, in our view. The last three films average an inflation adjusted $1.5 billion in global ticket sales, and Lucasfilm earned $500 million in operating income during 2005, the year of the last feature release. Disney will also take control of the popular Attack of the Clones cartoon series that continues to introduce young audiences to the brand.

CFO Jay Rasulo also noted that Star Wars is highly successful in the US and North America, but it can expand the depth and breadth of its products beyond just toys. The firm will also be able to monetize the franchise at its theme parks, both domestically and abroad. We think this deal has blockbuster potential, and we believe Lucas sold at a very favorable price given the long-term possibilities of the brand. Lucas was notorious for his strict control and love/hate relationship with fans, but we suspect Disney will be more willing to give fans what they want-say unchanged versions of the original trilogy-in exchange for increased earnings. Though we think Lucas has set up some agreements with respect to control (co-chairman Kathleen Kennedy will also become President of Lucasfilms), we think the iconic film maker will be fairly agreeable in how new film makers handle his creation. Any media company would have been interested in Lucasfilms-Lucas chose Disney for a reason.

Given Disney's massive scale, experience with monetizing franchises, and successful integration of the Marvel acquisition, we expect the firm will generate fantastic returns on this investment, though it will be dilutive to earnings per share in 2013 and 2014. The firm expects to repurchase the 40 million in shares it issued over the next two years. Regardless of critical acclaim or disgust, we think moviegoers will flock to Episode VII in 2015, and licensing revenue should continue to grow. In spite of criticisms that Star Wars is past its prime, we think $4.05 billion could look like a bargain relatively soon.

Nevertheless, shares are fairly valued at current levels. But given that Disney's strong franchises just got even stronger, we'd be very interested in adding the company to the portfolio of our Best Ideas Newsletter at a favorable valuation (below the low end of our fair value range). For a read on how we calculate the intrinsic value of Disney and 1,000+ other firms we cover, please click here. We're also fans of its dividend growth potential, as we outline here.

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.