Valuation Changes Associated with the Fox/disney Divestiture Transaction

By Sergi, Bruno S.; Owers, James et al. | Economics & Sociology, April 1, 2019 | Go to article overview

Valuation Changes Associated with the Fox/disney Divestiture Transaction


Sergi, Bruno S., Owers, James, Alexander, Alison, Economics & Sociology


Introduction

In pursuit of their responsibility to maximize the value of the firm to its shareholder owners, top management frequently reviews the set of Strategic Business Units (SBUs) a firm has and makes decisions as to whether the firm is optimally structured from an Industrial Organization (IO) perspective. If significant changes are required, restructuring is often employed. There are two types of restructuring: making a firm larger (Mergers & Acquisitions) and making a firm smaller (Divestitures). There is now a large body of research and professional literature for each of these strategies. (see, for example, Alexander & Owers, 2009). From both research and professional perspectives, the consistent profile of findings with Mergers and Acquisitions are that the firm being bought always increases in value while the acquiring firm most often incurs losses in value (see Peltier, 2004). In contrast, with divestitures the profile of findings is that both seller and buyer firms gain (see Hite, Owers, & Rogers, 1987; Sicherman & Pettway 1987).

Firms in the media industries have faced particularly challenging circumstances in recent times, and many media firms are restructuring in response to the challenges associated with the consequences of regulatory change, technological developments and their implications for the delivery of media products, and the associated changes in the competitive structure of the industry. In response to these significant challenges, many media firms have engaged in Mergers and Acquisitions, while others have undertaken divestitures. In some cases, the same firm has undertaken both Mergers and Acquisitions, and Divestitures. One prominent such firm is 21st Century Fox.

This research paper employs established financial economics methodology to examine the recent Fox major Divestiture. This was a classic Corporate Control Contest as there were two explicit potential buyers for the Fox assets being divested in addition to the typical prospective bidders "waiting in the wings." Mostly all the previous research into the valuation consequences of Divestitures has measured their impact on the transacting firms in percentage metrics. In this research paper, we add to the literature by calibrating the valuation consequences of strategic steps in the transaction in monetary (dollar) terms. This emphasizes the major value influencing implications of these divestiture Corporate Control Contests for the firms involved.

In the next section the profile of the Fox/Disney divestiture is outlined, followed by the empirical methodology employed. The body of the paper identifies 11 significant "Event Dates" on which material new initiatives were revealed. The valuation consequences for Fox, Disney and Comcast are calibrated, and the findings are placed in the context of both the theoretical frameworks that pertain and the results from previous Divestiture research. An epilogue follows, and the paper concludes with a summary and review of the contributions of the article.

The Fox Divestiture

In November 2017, it was reported in the Financial press that Rupert Murdock of 21st Century Fox had held discussions with Robert Iger CEO of The Walt Disney Company about the potential sale of a substantial portion of Fox's assets to Disney. That set off a sequence of events that saw multiple bidders for those Fox assets, and what is termed a "control contest." In addition to Disney, Comcast made a formal bid. The initial Disney bid of $51.4 Billion was topped by the subsequent Comcast bid of $65 Billion. Disney responded with an increased bid and changes the form of consideration (the type of payment) from all stock to a 50/50 stock/cash mix, of $71 Billion. Comcast withdrew, and that Fox shareholders accepted Disney bid on July 27, 2018.

This sequence of events created massive amounts of value for both Fox and Disney shareholders. This is in line with the overall profile of previous research findings (for example, those found in the foundational research paper of Hite, Owers, and Rogers (1987), but the value gains, especially for the buyer, are more significant than identified in previous studies. …

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