Star Wars, another good acquisition it is

Disney (DIS) has announced that it has bought Lucasfilm, the owner of the Star Wars and Indiana Jones franchises for $4 billion. DIS is the world's pre-eminent brand/content owner and has the widest distribution reach with DIS TV, theme parks, games and toys. DIS has a track record of acquiring good content, DIS bought Marvel for a similar price tag in 2009 and bought Pixar for $7.4 billion back in 2006. Stars Wars will continue in the same tradition, its content will benefit greatly from DIS extraordinary reach. As Bob Iger the CEO mentions the Star Wars “universe of more than 17,000 characters inhabiting several thousand plants spanning 20,000 years offers infinite opportunities.”

Opportunities, there are

The acquisition adds content that will benefit all of DIS businesses for years to come. In toys DIS has the opportunity to cut costs and increase revenues. Current Star Wars products are sold through 3rd party representatives, DIS can go direct. They already have strong bargaining power with their brands and with Star Wars this position will only strengthen. Less than 40% of Lucasfilms profits are international, they have historically focused on North America and toys. DIS will be able to increase revenue by adding to the product range ie Darth Vader lunch boxes and by distributing internationally.  

The films division will benefit from the new Star Wars movie to be released in 2015 episode 7, followed by episodes 8 and 9 with long term plans to release a new film every 2-3 years. George Lucas will serve as a creative consultant on the upcoming films. No one will be more excited by this news then this guy, the famous Star wars kid.

 Source: You tube 

On the theme park front DIS can add Stars Wars related attractions in Hong Kong and Shanghai. They already have Star Wars and Indiana Jones rides in the other parks. While on TV DIS will look to incorporate additional Star Wars programming on the Disney channel, it won’t just be kids watching these channels any more!

Valuation, afraid you will not be

The acquisition will be low single digit dilutive for 2 years. Licensing revenue in 2012 was $215m so DIS paid around 18.5x this number. They also disclosed that in 2005, the year in which the most recent Star Wars film was released, Lucasfilm generated $550 million in operating income. DIS has also estimated that the most recent 3 Star War films have averaged $1.5billion in today’s dollars in box office. So while the acquisition is dilutive there seems to be a reasonable balance paid for future potential and past profit.

The force is with you

An interesting comment management made on the call was that they believe DIS shares to still be attractively priced. So while half of the purchase price will paid in DIS shares ($2 billion dollars worth), DIS intends to repurchase these shares within the next 2 years. It’s a good sign when management are reluctant to issue stock and if they do are willing to buy them back.

When DIS announced the Marvel acquisition in 2009 the stock fell 3% to $25, the stock has doubled since. DIS stock will likely trade sideways as investors digest the news providing an opportunity for longer term investors. Long term the news is good as the acquisition of LucasFilms is following the same game plan as set out by DIS’s past acquisitions of Marvel and Pixar. DIS’s track record and reluctance to issue stock suggests that even with a 33% share price increase year to date the stock still offers long term upside for investors.

Star Wars kid, doing well he is
By the way, the Star Wars kid in the video, well he's a lawyer now. Take that Darth Vader! Its great to see him doing well. DIS could make a movie out this, something similar to Cool Runnings? Click here to find out more. (The link has the original video without special effects).

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Disclosure: Decisive is long DIS

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