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Disney could be takeover target

Feb 4, 2002  •  Post A Comment

If an economic recovery doesn’t restore The Walt Disney Co.’s financial and operational luster, an unsolicited takeover offer might.
Disney escaped Wall Street’s wrath last week with its latest quarterly earnings, which were dismal compared with last year’s already weak performance yet generally better than analysts expected due largely to aggressive cost cutting. But it is unclear how much longer Disney can hobble along from one quarter to another without any dramatic change in the management of its prized assets or the lifting of its stock price, even in a volatile market.
Morgan Stanley Dean Witter analyst Richard Bilotti questions whether, even with an economic upturn, Disney-as is-can ever adequately recover.
“Looking back at Disney over the past five years causes us to question the viability of a longer-term recovery,” Mr. Bilotti said.
He said Disney’s cash flow has declined 6 percent since 1998, and estimated earnings into fiscal 2003 suggest only a slight 3 percent gain.
Disney’s $21-per-share price already reflects any marginal recovery the company makes into 2003, he said, leaving virtually no room for much price improvement.
That alone could make Disney a takeover story this year.
“There is no reason to believe that is imminent, and I don’t know of any combination that would make sense more than the course we are on,” said Tom Staggs, Disney’s chief financial officer.
Indeed, some analysts value all of ESPN’s related assets at the nearly $20 billion Disney paid for all of ABC in 1996.
Although Disney’s market value has hovered around $45 billion, analysts say the company could easily sell for more than twice that, depending upon the deal and buyer.
What ultimately may force the issue for Disney is its stock, which may make it more attractive to would-be buyers who can rely on their own financial resources and outside backing even if their own stock is also down.
Disney’s stock has been fluctuating between a 52-week low of $15.50 and a high of $34. It settled in at $21 a share following the company’s earnings report last week. The Disney board has no poison pill or other provisions in place to deter a hostile takeover.
With the prospect of deregulation that would allow dual ownership of major broadcast networks and major-market TV station duopolies, General Electric Co. and its NBC subsidiary emerge as a contender for Disney. GE has the financial resources to make such an acquisition, and its new chairman, Jeffrey Immelt, has said he wants to expand, not sell, NBC.
The odds-on favorite for a Disney takeover is the combined Comcast-AT&T, but sources close to the company say it will focus on “getting it right” for at least the first year after the merger before it bites off another major acquisition. “We’re talking at least two years before a Comcast-AT&T offer might materialize,” said one high-level source. “Even with scale behind it, Comcast has chosen to grow its content organically at a much lower price.”
Deal-hungry investment bankers recently approached Viacom and proposed a Disney takeover, well-placed sources said. However, turmoil among Viacom’s top management, not expected to be resolved any time soon, makes it less likely to be contemplating another big deal. News Corp. and AOL Time Warner, because of their resources and debt capacity, are considered wild cards.
Another notion being floated by investment bankers is that former Disney studio chief Jeffrey Katzenberg, one of the three principals of DreamWorks SKG, would lead a consortium of suitors, each of whom would be expert in operating a core business. Such a group might include broadcaster Clear Channel Communications or Marriott, a potential theme park manager.
Last week, Disney’s media networks reported a 58 percent decline in fiscal first-quarter operating income to $246 million driven by a $365 million negative swing in broadcasting operating income to a loss of $76 million, on a 3 percent in revenues to $3 billion.