Fox Closes Disney Deal, Issues Affiliate-Fee Warning

As many as 4,000 jobs could be cut at newly combined studios
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Fox Corp. threw a brief scare into investors shortly after it completed its long-brewing $71.3 billion asset sale to The Walt Disney Co., with a securities filing warning that the newly lean programmer expects a “meaningful deceleration” in affiliate fees for the six months remaining in the fiscal year.

Fox dipped after the warning on March 20, but the decline was short lived. Fox shares regained most of the losses — closing at $40.02 on March 21, up 3.6% — after analysts realized the deceleration wasn’t as bad as it at first seemed.

Disney will offer more insights on its plans for the Fox assets at an April 11 investor day. 

Disney will offer more insights on its plans for the Fox assets at an April 11 investor day. 

MoffettNathanson senior analyst Michael Nathanson said in a research note that he had already expected an affiliate-fee slowdown in the second half of fiscal 2019 — he forecasted 5% growth — based on tough comparisons to the prior year after big renewals for Fox News Channel with AT&T and with Comcast for Big Ten Network. Nathanson lowered his second-half forecast to 3% affiliate fee growth, but said Fox’s 10-Q filing showed stronger-than-expected increases in the first half of the fiscal year. His full-year affiliate fee growth forecast was unchanged at 7%.

Otherwise, Fox showed better-than-expected strength in retransmission-consent revenue, which rose 24% in the first half of the fiscal year. Nathanson maintained his 18% retrans growth estimate for FY2019, and said over the next five years total retrans revenue should rise from $1.38 billion in 2018 to $2.58 billion by 2023.

For Disney, pink slips started going out shortly after the deal closed to pare down the workforce by as many as 3,000 to 4,000 jobs by some estimates. The layoffs are expected to focus on the sales and distribution divisions, where there are a lot of redundancies with Fox. On Thursday (March 21) Twentieth Television chief Greg Meidel announced his departure and more are expected to come. Disney also now has 90 days to find a buyer for 22 Fox-owned regional sports networks.

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Disney plans to offer more strategic insights at an upcoming Investors Day in Burbank, California, on April 11, but has let some information dribble out in the meantime.

On the programming front, Disney will capitalize on its Star Wars franchise, offering a live-action series for its Disney+ streaming service, set to debut later this year. More Marvel shows and a series based on Disney’s High School Musical also are expected. Hulu, which Disney now controls, will likely become home to edgier Fox content.

Wolfe Research managing director Marci Ryvicker maintained her $147-per-share target on Disney stock and looked forward to the Investors Day. “We think a LOT of the uncertainty is going to be cleared up — synergies (management has been hinting of upside), Hulu (we think losses may narrow) and Disney+,” she wrote.

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