Disney's Spidey Sense is Tingling

by Investment U Research Team

Disney's Spidey Sense is Tingling

by Louise Harris, Investment U Research Team

September 11, 2009

The entertainment world is changing, and companies in the business know that all too well... hence the reason why The Walt Disney Company (NYSE: DIS) just announced its acquisition of Marvel Entertainment Inc. (NYSE: MVL)

Comic book fans might hate the move, but in order to survive in today's climate, Disney has to look outside the box office to the whole entertainment package.

Gone are the days when movies made all their money at the box office. And with DVD sales shrinking, Hollywood has no choice but to bring in more revenue by delving into toys, videogames, clothing, rides, digital copies of movies and Internet streaming.

Naturally, Disney hopes to milk the merger for all its worth, exploiting Marvel's 5,000 characters across the entire spectrum over the next several years, especially considering Spider-Man, Iron Man and the Incredible Hulk's success in past years.

It also hopes the merger will expand its audience base to include boys in their preteens into adulthood... a difficult audience for Disney to capture in the past.

Marvel Makes One Pricey Acquisition

Of course all of that potential comes at a price... a hefty one according to competitors and the financial press, who have criticized Disney for paying $4 billion for Marvel. Meanwhile, Disney holds firm to its belief that this new move will reap great rewards.

Shareholders of the comic book empire will receive $30 a share and three-quarters a share of Disney stock. The deal is valued at $50 per Marvel share, a 29 percent premium.

Personally, we're not so sure Disney can pull off the gains to make the purchase worthwhile... at least not for shareholders.

For one thing, long-term agreements with Sony Corp. ADR (NYSE: SNE) and News Corp. (Nasdaq: NWS) mean it can't produce any Spider-Man - one of the highest grossing movie franchises, bringing in over $1 billion domestically - and X-Men films.

And Disney has accepted the full risk of building up a reputation for the lesser-known characters on its own.

Marvel was eager for the acquisition because of the risks involved in promoting unknown characters. Disney on the other hand, is hoping the acquisition will fill a void.

The Plus Side Of The Disney - Marvel Merger

While we don't feel great about the price, we're not all that concerned about Marvel fans' complaints that Disney will ruin the comic books with happy-go-lucky elements.

Yes, that anger could have detrimental effects on comic book sales, but fans threatened to boycott Harry Potter and the Half-Blood Prince when Warner Brothers moved the release date back six months too.

Yet by the time the movie did debut, they came out in droves. We expect comic book fans to do the same, especially since Disney promised to leave the business to Marvel. It might very well change its mind later on, but it's a good strategy to appease fans for now.

For that matter, expanding in general is a good idea. Disney already has its fingers in television, the publishing industry, movies and animation, radio stations, video games, magazines and computer sites. Why not comic books too?

The merger also hurts its competition. Although Paramount has deals for Iron Man 2, Captain America, and the Avengers, Disney will keep those deals from extending, therefore leading to increased revenues and market share for itself.

Why Disney Should Have Thought Twice About Marvel

Currently, Disney is trading around $25 a share. If this merger works out favorably, expect that price to increase. If it fails though, the price will likely remain flat as evidenced by the stock showing little change after the announcement.

Put simply, Marvel just might not be the gold mine Disney thinks it is. People could grow tired of seeing comic book characters on the big, small, micro and mini screens.

Even if they don't, the country is in a lingering recession. When people don't have jobs, they don't usually indulge in entertainment. That showed this summer, when only a few of the expected blockbusters actually made it big.

Of course, Disney has survived other hard times before. And if Time Warner can make comic book franchises work, you'd better believe that Disney can too.

Movie studios in general may very well look to superheroes to supply their feedstock for new licenses, television shows, movies, games and action figures. Not to mention that comic books easily lend themselves to apparel, soundtracks, bounce equipment and more, so retail companies could boost sales by signing agreements with Disney.

It's clear that both the larger Disney company and Marvel shareholders will profit from the buyout, and consumers will get new choices for their entertainment dollars.

What we're still not sure of, is whether Disney shareholders will come out ahead.

Good investing,

Louise Harris

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