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  • Tim Cook: Call Bob Iger And Buy Disney 7 comments
    Feb 10, 2013 9:52 PM | about stocks: AAPL, DIS

    David Einhorn and a slew of other money managing gurus are trying to browbeat Apple (AAPL) into parting with the cash pile that's been building domestically and overseas as well. Barclays analyst Ren Reitzes breaks out Apple's cash as follows: "$137 billion of total cash and investments including $43 billion of domestic cash and $94 billion of overseas cash." He further states: "We are currently forecasting free cash flow of $44.29 billion in 2013 ($46.89 per share) and $51.07 billion in FY14 ($54.35 per share)." Here is a good summary of analysts' comments on AAPL including Reitzes. Our theory is contrary to what these money managers are suggesting. Ironically, these money managers are consistently trying to raise more money to manage and yet they are trying to convince AAPL to part with their hard earned cash.

    Our view sees APPL as an excellent creator of devices that consume content and is a vital distribution channel for those digital bits. In addition, it is a great source of cash to pay down substantial debt which a company has outstanding. Disney (DIS) fits the bill on both counts. "Creative houses" such as Disney dream about access to a juggernaut distribution channel like this. In fact, AAPL just announced the 25th billion download on iTunes. That's up from 15 billion in July 2012: an amazing 10 billion downloads in 5 months. With that distribution system, why doesn't AAPL buy the content creator and capture more profit from the food chain? It would certainly not be a risky venture. In fact, it would be reuniting the "House of Jobs" if Disney was the first target. It would bring Pixar Animation Studio, purchased by Disney in 2006, back to Job's original company. Kevin Mayer, Disney's executive vice president of Corporate Strategy and Business Development since June 2005 is arguably one of the most powerful executives at the company today. Kevin was at Disney when they did the hallmark acquisition of ABC CapCities and is certainly up to the task of doing a historic transaction such as this.

    Taking a look at the numbers on such a combination, Disney has a market cap of approximately $98 billion and an enterprise value of $93.66 billion as of February 8, 2013. AAPL has a market cap of $446.03billion and an enterprise value of $429.77 billion as of February 8, 2013. The most recent Disney balance sheet is nothing like APPL and can be cleaned up in one fell swoop with a deal of this magnitude. We looked at their most recent SEC filings and copied their balance sheet as of 12/31/2012 below because it represents why this deal makes sense {to be honest, Disney looks like an old homebuilder stock in terms of its balance sheet}:

    If the acquisition is done as a tax efficient all stock deal, AAPL could easily repay a lions share if not all Disney's $27 billion in current and long term obligations and that alone would increase the profitability of the combined companies by eliminating all interest expenses. In addition, the entire revenue stream from Disney content downloads would be retained by the combined company. Moreover, because Disney has debt outside the US related to their theme parks business, AAPL's offshore cash could be used tax efficiently paying those debts off in their respective currencies.

    Logistically, it would have to be a friendly deal. This would in large part rely on Steve Job's wife Laurene who controls the estate and trusts which own {assuming they have not sold any from since 2009} 5.42 million shares of AAPL and 7.7% of Disney {currently the largest holder of the Disney}. This would be a great way for the estate to own more of AAPL in a tax friendly share exchange. According to the latest Disney proxy, Laurene would be the key decision maker of this possible deal with such a large stake in both companies. As of 9/30/2012, there were 1184 13F Filers {funds that exercise investment discretion over $100 million or more} holding Disney shares. Also, according to a Disney SEC S3 prospectus filed for George Lucas who sold his Star War's empire to Disney in the same fashion I am suggesting here, there are 980,000 record holders of DIS shares, thereby giving Laurene a lot of negotiating power with Disney. Maybe George would have stuck around if a deal like this was in the works.

    We found some interesting filings from AAPL. Here is an interesting excerpt from AAPL's preliminary proxy filed with SEC in December 2012:

    Transactions with Related Persons

    The Company enters into commercial dealings with Disney, J.Crew and Avon that it considers arms-length, including sales arrangements and, in the case of Disney, iTunes Store content licensing agreements and similar arrangements. The Company enters into these commercial dealings in the ordinary course of its business. Mr. Iger, a director of the Company since November 15, 2011, is President and Chief Executive Officer and a director of Disney. Mr. Drexler is Chairman and Chief Executive Officer of J.Crew. Ms. Jung was Executive Chairman and previously Chairman and Chief Executive Officer of Avon during the fiscal year. The Company does not believe that any of Mr. Drexler, Mr. Iger or Ms. Jung has a material direct or indirect interest in any of such commercial dealings.

    So the bottom line is that Tim Cook, AAPL's CEO has Bob Iger's, Disney's CEO cell phone number. No bankers needed for this deal other than for a fairness opinion (just kidding).

    We took the liberty of taking Disney's balance sheet and superimposing it on top of AAPL's balance sheet to see what the combination would look like from a balance sheet perspective if it was an all stock deal. We are not giving effect to the goodwill that would be created if APPL paid Disney shareholders a 20% premium to the closing price on February 8th, 2013 in shares. This would cause up to $19.6 billion in goodwill creation on the combined company's balance sheet.

    (click to enlarge)

    The synergies from the combination would be countless. At 10 billion downloads per 5 months and assuming 5 % were from Disney at $.30 per download coming from Disney's portion, that would generate an additional $150 million for 5 months or $360 million annually. Yes, some C level overhead would be reduced. But for the most part, the organizations would remain intact. The operating costs could be streamlined. Auditing and legal may come down, but these are not very big and not the real juice in this combo. Imagine having no capital constraints to build Disney Parks in China and South America. Imagine having Apple devices in every park as an electronic tour guide. The opportunities for the combined company are probably what Steve Jobs imagined several years ago. Cook & Co have a chance to make it happen thanks to media hound fund manager Einhorn. Our feeling is its easy to give money back to shareholders and very difficult to make it when you need it. Don't give away the gold from the Goose, feed the Goose to make more.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DIS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: Apple may be a long candidate depending on what they ultimately decide.

    Themes: long-ideas Stocks: AAPL, DIS
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Comments (7)
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  • Tufenk
    , contributor
    Comments (963) | Send Message
     
    Author’s reply » Disney/Apple comments here, thanks
    11 Feb 2013, 06:35 PM Reply Like
  • Kevin Hsu
    , contributor
    Comments (27) | Send Message
     
    I suppose since most of the cash is overseas, they won't be purchasing large domestic companies.
    12 Feb 2013, 12:39 AM Reply Like
  • Tufenk
    , contributor
    Comments (963) | Send Message
     
    Author’s reply » They could in an all stock deal, keeping the cash overseas and deploying more tax efficiently.
    12 Feb 2013, 05:20 AM Reply Like
  • Sam Liu
    , contributor
    Comments (3864) | Send Message
     
    AAPL acquiring DIS would be too far from Apple's focus-- which has been having trouble delivering now.
    12 Feb 2013, 08:35 AM Reply Like
  • Tufenk
    , contributor
    Comments (963) | Send Message
     
    Author’s reply » Its like buying property on 5th Avenue with all cash/ no debt and collecting rent. Leave all DIS management in place, no need to invent anything on that side of the business. I do understand and appreciate your comment however, thank you
    12 Feb 2013, 08:43 AM Reply Like
  • citypound
    , contributor
    Comments (156) | Send Message
     
    I like the idea.
    12 Feb 2013, 10:38 AM Reply Like
  • Tufenk
    , contributor
    Comments (963) | Send Message
     
    Author’s reply » Thanks, me too :-)
    12 Feb 2013, 10:52 AM Reply Like
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