Disney Would Likely Trade Down On A Netflix Deal

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Walt Disney Co DIS disclosed in November that its flagship sports network ESPN continued to suffer subscriber losses.

The recent speculation of Disney acquiring Netflix, Inc. NFLX would result in only modest cost synergies and Disney’s stock may trade down on such a deal, Brean Capital’s Alan Gould said in a report.

Disney's US attributable cable subscribers declined 1.6 percent in 2016, versus a 1.9 percent decline in 2015, with ESPN down 2 percent as compared to a 3 percent drop last year. “This could be an indication that the worst of the migration to small programming packages has already occurred,” Gould wrote

Gould maintained a Hold rating on the company, while raising the fair value estimate from $100 to $108. The EPS estimates for FY 2017 and FY 2018 have been raised by $0.15 each to $6.00 and $6.70, respectively.

How Disney’s Shares May Respond To A Netflix Purchase

Investors have been speculating a Netflix acquisition ever since Disney Bob CEO Iger began indicated plans to use technology to reach consumers more directly.

While such a deal can't be ruled out, Disney is unlikely to make an acquisition worth $65-$70 billion, the analyst noted. At this price, Netflix is worth almost 40 percent Disney’s size.

Netflix has gained about an estimated 65 million domestic subscribers in five years, while ESPN has more than 80 million subscribers. There would be modest cost synergies, resulting in dilution of an estimated 24 percent to the FY 2017 EPS estimate and 15 percent to FY21.

Disney’s shares may re-rate higher, although they would likely not trade at a multiple higher than that of Alphabet Inc GOOGL, Gould commented. He added that Disney’s shares would likely trade down on a Netflix deal.

“DIS, more than any other media company is owned by generalist portfolio managers, and it has historically traded as a multiple of EPS, more than other media companies.”

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Posted In: Analyst ColorReiterationSportsAnalyst RatingsGeneralAlan GouldBrean CapitalESPN
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