The Disney-Fox Deal: With Great Power Comes Great Regulatory Risk

After Walt Disney Co DIS confirmed it has reached an agreement to acquire most of Twenty-First Century Fox Inc FOXA's media and entertainment assets, investors can move to questioning the likelihood of the deal being approved by the regulatory bodies.

The Analyst

KeyBanc Capital Markets' Andy Hargreaves downgraded Fox's stock from Overweight to Sector Weight with no assigned price target.

The Thesis

The likelihood of antitrust risks from the deal appear high given Disney's potential share of theatrical revenue, share of domestic cable assets, and a strong position in sports, Hargreaves said in a note. It shouldn't come as a surprise if rival domestic MVPDs, theater owners, and even sports leagues oppose the deal through the regulatory process. On top of that, the regulatory environment is already "highly uncertain," which adds another risk to the deal.

Nevertheless, the merger of the two companies is a positive for both parties, Hargreaves said. On Disney's end, the merger improves its positioning in pay TV, film, sports, and non-sports over-the-top offerings. On Fox's end shareholders will be better positioned to "participate in the improved odds of success" given a greater scale while at the same time holding on to Fox's remaining assets in the highly profitable domestic TV business.

Price Action

Shares of Fox were trading flat Friday morning, while shares of Disney were higher by around 0.3 percent.

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