Apple And Disney: Deal Of The Century

by: Greg Sawchyn

Apple (NASDAQ:AAPL) is a company that has been on a tear, rising hundreds of percent over the last few years on the back of ever changing, ever improving products that define and redefine markets. This type of innovation has never been repeated on such a scale in the history of business. So where is the headline grabbing growth going to come from in the future? Samsung (OTC:SSNLF) and Apple have cemented themselves as the oligarchs of high-end smart phones. The world is a big place, but Apple won't be selling many $600 iPhones into markets where $600 is a multiple of per capita GDP. Perhaps a lower end phone to tap these markets? I highly doubt it. Anyone who has read the Steve Jobs biography knows that he would not be happy about sacrificing quality for price in any market. iPad has room to run, but, as the already dominant player in tablets, that story is known. Pure speculation of course, but the answer is Disney (NYSE:DIS).

Ruling Out Other Candidates

Apple's $100 billion cash hoard gives it a lot of options. So what should they do with their cash? One thing is for sure, letting it sit on the balance sheet at 0% is not a good use of capital.

I rule out most big tech companies. Why buy a Nokia (NYSE:NOK), Sony (NYSE:SNE), Dell (DELL), or Research in Motion (RIMM) when your products are superior and these companies seem content to play second fiddle? I also rule out backbone companies like Juniper (NYSE:JNPR), Cisco (NASDAQ:CSCO), etc. Apple's strengths are in interface innovation, smart marketing, and consumers. These companies do not offer opportunity in any of those areas. Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) are possibilities, but likely not. Netflix has a tarnished brand and unsustainable business model and Amazon is the Wal-Mart (NYSE:WMT) of online shopping, not many synergies there.

The Elephant in the Room

One reason why I haven't seen anyone else writing about this possibility is the egg on the face an author would get if he didn't mention AOL (NYSE:AOL)/TimeWarner (NYSE:TWX), the ultimate of internet bubble bad deals. One big reason the deal didn't work is that AOL had no way to deliver Time Warner's content in an efficient way. Try downloading a Harry Potter movie at 56k and let me know how that goes. Times have changed. The pipes and speeds are there to allow content delivery over the internet. Comcast (NASDAQ:CMCSA) buying NBC shares a lot of similarities with AOL/TimeWarner and I haven't heard many boo-birds on that one yet.

It's All About the Mouse

Currently with an $80 billion market cap Disney is definitely consumable based on a cash/debt deal right now and in a few quarters could comfortably be acquired with cash. $65/share, giving Disney a worth of about $120 billion, would get it done. An announcement this fall concurrent with the roll out of the new AppleTV would be great timing. Getting overseas cash back to the US is a problem for Apple, like many other companies, but even a deal using US cash and short term debt is feasible at this point. If another cash amnesty is announced, which I think will happen this summer as the Republicans and Democrats both try to buy favor with the business community, Apple wouldn't even need the short-term debt.

The Jobs family is already Disney's biggest shareholder, thanks to Disney's Pixar acquisition. With incomparable franchises in children's entertainment, sports broadcasting, and theme parks Disney presents the same moats as many Apple products do. No one is replacing ESPN, Cinderella, or Disney World no matter how much money they try to throw at it. Most importantly it is a forward facing consumer driven "feel-good" company, an image Apple has spent a long time cultivating for itself. The synergies are there. Do you think Disney character branded Mac's, iPads, and iPhones, would appeal to kids? Despite a lack of detail, the current AppleTV provides a model for what might come: buying content over the internet for streaming or downloaded delivery to a device instead of paying for a stream of 100's of channels from a cable or satellite company, of which one can be watched at a time and 80% of which are completely useless to any individual. A deal could also catalyze multiple expansion for Apple since Disney already trades at a higher P/E.

The online revolution is about content. Pipes are a commodity, but what comes through those pipes is not. No family would want to be without Disney's content which would give Apple an insurmountable lead in the living room and get the next generation indoctrinated in Apple's products at an early age. Details on AppleTV are hard to come by, but if Apple controlled Disney's content, every household in America, and many more in the world, would buy one. Toy Story 5 is going to be available exclusively on AppleTV for $19.99.

Disclosure: I am long DIS, TWX. I am short AOL