Analyst That Covers Both Disney (DIS) and Twitter (TWTR) Warns Disney NOT to Do It

September 27, 2016 8:17 AM EDT
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Nomura analyst Anthony DiClemente weighed in on reports yesterday that Disney (NYSE: DIS) is evaluating a bid for Twitter (NYSE: TWTR). He said he does not think a combo of the two "is likely to provide enough meaningful industrial or strategic logic to offset what promises to be a very high price tag for Disney and its shareholders."

DiClemente said while some might view the acquisition as forward-thinking, given 1) possible benefits to owning a scaled digital audience to which Disney might distribute its IP/content; 2) advantages to owning a real-time news and events platform to complement Disney’s news portfolio; and 3) a way to vertically integrate the distribution of ABC/ESPN sports content, so as to provide a hedge to declining TV ratings for ESPN, as analysts who cover both Disney and Twitter, however, "we think that execution risk here would be quite high given the large scale and financial dilution of a possible integration; in addition, we are specifically concerned that contractual restraints around some of Disney’s current professional sports rights contracts will require the company to incrementally invest in expensive direct-to-consumer digital sports rights in order to integrate TV and internet sports distribution."

The analyst said for a number of important reasons, Disney could find more shareholder-friendly uses for its capital than this acquisition:

• Our merger model suggests considerable financial dilution to CY17 DIS earnings. " Our pro forma model suggests that given the high price and high valuation multiple paid, that an acquisition of Twitter could result in at least ~11% dilution to Disney’s 2017 EPS, even if it paid a 25% premium with 60% equity, and this when generously assuming an annual run rate of ~$150mn in cost synergies..."

• Contractual constraints on existing sports rights likely limit the strategic rationale. "The current NFL streaming agreements with media companies only permits digital distribution through 3rd parties (i.e., MVPDs), restricting 1st party digital distribution. As such, we believe Disney cannot leverage its current NFL programming rights across TWTR’s user base/platform..."

• Reaccelerating Twitter’s slowing growth is no small challenge. "In the last year, Twitter’s user base has grown by only 9mn to its current 313mn, at a time when Instagram has added more than 100mn to reach its current base of 500mn. Further, Twitter’s revenue per user growth has slowed from 43% YoY during FY15 to the low-single-digits in 2H16, as implied in the company’s revenue guidance. Our checks with ad buyers suggest continued weak demand from branded advertisers for Twitter ad inventory, as the platform struggles to deliver competitive ROI at scale. It is not obvious to us the path by which Disney could reverse these trends."

• Media acquisitions of Internet companies are rarely successful, and not as successful as content acquisitions. "The Media industry’s track record in relatively large scale digital/internet acquisitions is not exactly stellar. Film/TV content companies simply have not married well with digital distribution. We are mindful of News Corporation’s very unsuccessful acquisition of Myspace, and of Time Warner Inc’s acquisition of Bebo, to name a couple..."

• Given these points, then why might Disney be considering a Twitter acquisition? As media viewership continues to shift to digital platforms, Twitter’s younger, mobile-first audience – one which overindexes on sports enthusiasts – is large, scarce, and valued by ad buyers. In addition, Disney could possibly better monetize Twitter as a real-time events platform against its own core linear offerings by offering advertisers enhanced cross-platform marketing opportunities. Twitter’s own Jack Dorsey and Facebook’s Sheryl Sandberg both sit on Disney’s Board, and both likely advocate the need to substantiate Disney’s digital footprint. It is our humble view, though, that Disney could do this itself, that it could utilize technology to do what it’s already doing with so many facets of its company, to take first-class content closer to the consumer, allowing the superiority of the content to organically drive the growth of the audience."

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