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January 19, 2006

Disney to Buy Pixar?

After seeing the lead article in this morning's Wall Street JournaI, I quickly reviewed several research reports from the past month which discussed the potential acquisition of Pixar by Disney. In an all stock transaction, as speculated today in the Wall Street Journal, analysts expect EPS dilution of around 10% for DIS at a price of $60. Dilution rises to 13% at a price of $70. Any use of cash lowers dilution. The analysis used to arrive at these figures merely adds PIXR's estimated financials to Disney's. This probably overstates actual dilution since presumably there would be some synergies in a deal. For example, PIXR's EBITDA represents just its share and it is plausible that if the entire entity were under one roof the combined EBITDA of DIS and PIXR would exceed thier currently separate levels. Additionally, PIXR has only been producing one movie per year. It is equally plausible that production rises to 2 films per year.

I think the market would look beyond dilution if a deal were to occur. Animation is what drives DIS and separates it from its entertainment conglomerate peers. Theatrical box office, home video, theme parks, and consumer products are driven by DIS's success with animation. If PIXR increases the odds of success then some level of dilution is clearly acceptable....

Staying with the intangibles, a deal like this also impacts the corporate culture. DIS is noted for having a conservative culture. As a content company in a world of rapidly changing distribution, this caution could be considered a drawback. A bold move to acquire PIXR, bringing high quality and aggressive new managers like Steve Jobs and John Lassiter, would shake up DIS, arguably for the better from a competitive standpoint. A DIS-PIXR deal probably was never possible under Michael Eisner's leadership. If the deal goes down, or just the fact that it has advanced this far, means that Bob Iger has stamped DIS as his. Again, Id say that is arguably a positive at least as far as sentiment toward the shares goes.

Lots of risks in this deal for sure especially when PIXR inevitability has a movie that underperforms. However, as a DIS shareholder I'd say the dilution and risks are worth it given the potential invigoration of the company's crucial animation division and conservative corporate culture.

Posted by Steve Birenberg at January 19, 2006 01:03 PM in DIS