The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First. 

Disney Stock Forecast: Disney Doesn’t Need British Firm Sky, It has Hulu

Summary:

• Comcast ignited a bidding war for Sky Broadcasting, adding spice to Disney’s $52 billion buyout of Twenty-First Century Fox Film/TV assets.
• Comcast’s offer of $31 billion for Sky is 12.50 pounds per share, or $31 billion.
• Comcast’s bid is notably higher than the 10.75 pounds per share offer of the Murdoch group for the 61% of Sky that Twenty-First Century Fox doesn’t own.
• To avoid a bidding war, Disney can just exclude Sky from its deal with Twenty-First Century Fox. Disney can focus on growing Hulu and its own SVOD services.
• The film/TV library of Twenty-First Century fox is more important than that company’s 39% stake in Sky.

Disney (DIS) should avoid falling for Comcast’s (CMCSA) new bidding war for pay-TV/streaming video operator Sky Plc (BSYBF). Disney’s $52.4 billion all-stock acquisition of Twenty-First Century Fox (FOXA) film/TV assets is not the end of the story. Disney is also reportedly hoping to buy Sky from Twenty-First Century after it acquires the 61% it still doesn’t own. Twenty-First Century Fox only owns 39% of Sky.

Comcast’s offer of 12.50 pounds per share ($31 billion) for Sky derailed Disney’s plan to eventually acquire 100% of Sky. Aside from paid TV/video streaming, Disney and Comcast covet Sky’s broadband and mobile customers.

(Source: Sky)

Sky’s presence in broadband internet and mobile subscriptions has helped it achieve consistent growth rate since 2015. It is an attractive acquisition target for both Disney and Comcast.

Unfortunately, the Murdoch Group’s 2016 offer of 10.75 pounds per share (for the 61% remaining shares of Sky that it doesn’t own) is 16.2% lower than Comcast’s new bid.  Furthermore, the UK regulator has already rebuked Mr. Murdoch’s takeover plan of Sky last month. Fearing the Murdoch having too much influence on the UK media, the British Competition and Markets Authority did not approve of the Murdoch’s 11.7 billion pounds offer to buy the remaining 61% of Sky.

Why Disney Should Not Challenge Comcast

Yes, Disney could make a separate bid for Sky and UK regulators might approve it. However, it can become detrimental to Disney shareholders. Going forward, nothing can prevent Comcast from also upping its current 12.50 pounds per share offer. Sky is a top acquisition target for Comcast. That British company touts 22.9 million paying subscribers. Taking control of Sky can double up Comcast’s subscribers. As of last year, Comcast’s video customers numbered 22.36 million.

Comcast will bid higher and higher if challenged. It is desperately in need of new customers. As you can see from Statista’s chart below, the subscriber growth of Comcast has been stagnant since 2010. Comcast needs Sky more than Disney does.

The current $52.4 billion deal with Fox already gives Disney a controlling stake (60%) in Hulu. Disney can let Comcast gobble up Sky. In return, Comcast must sell its 30% stake in Hulu to Disney. Hulu has 18 million subscribers. It is big enough to be a good alternative to owning Sky. Disney can tie up its new subscription video-on-demand [SVOD] service to Hulu’s wagon. Together, Disney SVOD and Hulu could build up 30 million to 50 million subscribers within the next five years.

I would also prefer for Disney to have Hulu quickly expand outside its current U.S./Japan-only markets. Disney and Fox have a large library of content which can help it contest Netflix’s (NFLX) global reach. Netflix has more than 50 million subscribers. Hulu can replicate this feat if Disney really puts its mind to it.

My Takeaway

Content is king. Pipelines to deliver content can be built and/or improved. Yes, Sky is a desirable addition to Disney’s empire – but it is not an urgent necessity. Subject to regulators’ approval, Disney stands to gain Twenty-First Century’s massive library of TV/Film assets. Disney should focus more on monetizing these newly acquired assets than engaging Comcast in a bidding war for Sky. Fox gave Disney the TV/movie rights to Deadpool, the X-Men, and Fantastic Four. Disney now has a more robust Marvel Cinematic Universe.

Just like the global hit Black Panther movie, future Disney-helmed Deadpool, X-Men, and Fantastic Four movies could generate $500 million or more in global ticket sales. Movie-related merchandise licensing can further double-up these  future movies’ revenue contribution.

Comcast can have Sky and I will still rate DIS as a buy.  Disney’s long-term growth prospect relies more on how efficient it can monetize its film/TV assets, not on content delivery service providers like Sky. My buy rating for this stock is congruent with its positive near and long-term algorithmic market trend forecasts.

Lastly, TipRanks-tracked analysts have an average 12-month PT of $119.11 for Disney’s stock. Going long on DIS now while it still trades below $104 could turn out profitable.

(Source: TipRanks)

Past I Know First Forecast Success with DIS

On November 6th, 2016, we published a bullish article on Disney including stock positive short and near-term algorithmic forecasts, with a signal of 13.57 and predictability of 0.49 .

DIS stocks returned more than 16% in 3 month period in a good agreement with the bullish forecast.
Current I Know First’s subscribers received this bullish forecast on November 6th, 2016.

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I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.