In a landmark merger that creates the largest entertainment company in the world and promises to quicken the realignment of Hollywood, the Walt Disney Co. agreed Monday to buy Capital Cities/ABC Inc. for $19 billion in cash and stock.
The combination brings together the No. 1 television distributor and network and the nation’s premier producer of movies to create a one-of-a-kind global powerhouse with combined sales of $20.7 billion.
If the deal is approved as expected by federal regulators and shareholders, the resulting Walt Disney company would dwarf the current entertainment leader, Time Warner Inc., which has about $16 billion in revenues. It would be the second-largest merger in U.S. history, after the $25-billion acquisition of RJR Nabisco Inc. by Kohlberg Kravis Roberts & Co. in 1989.
The merger also comes on the eve of the anticipated sale of the third-ranking network, CBS Inc., to Westinghouse Electric Corp., which could be announced this week.
“This creates a company with global reach that can meet the ongoing demand for American entertainment in the multichannel environment around the world,” said Christopher Dixon, an analyst at PaineWebber Inc. “It gives them two very strong brand names and the scale to go up against Viacom, Time Warner and News Corp.”
Perhaps the most stunning part of the deal was the reaction. It drew widespread praise from Wall Street investors and media executives on the inside and outside of both companies. Analysts said the merger was good for shareholders of both companies and called the partners perfect mates, with matching corporate cultures, similar conservative business philosophies and a long history.
Even the most hardened critics were impressed with the lack of overlap between the two operations and the possibility for cross-promotion between their properties. Unlike many mergers, this one is not expected to result in layoffs of any of the combined 90,000 employees. The network will continue to be headquartered in New York, and will be a subsidiary of the Burbank-based Disney company.
The industry also congratulated Michael Eisner, the often risk-averse chairman of Disney, for stepping up to the plate after several rounds of warm-up talks with both ABC and CBS. Eisner, who will head the combined company, said he has held talks with Thomas S. Murphy, the founder of Capital Cities/ABC Inc., six times over the last three years about pairing up.
“This is a triumph for Eisner,” said Gordon Crawford, an investor with the Capital Group, which owns stock in both companies. “He got the best network, the best cable network in ESPN, and major stations in New York and L.A.”
In an unusual symbol of Wall Street’s acceptance, the stock prices of both companies traded up. Cap Cities surged $20.125 to $116.25 on a deal valued at $122.37 per share; Disney rose $1.25 to $58.625.
The stock price of an acquiring company generally drops after an acquisition announcement because of the debt and uncertainty it creates.
“The professionals immediately understood the synergy of the deal,” said Mario Gabelli, a money manager who has a large stock interest in both companies. “This is about globalism. Advertisers like Procter & Gamble and Coca-Cola are going around the world and want the frequency and reach broadcasters provide.”
In addition to a raft of characters that play well from Japan to Scandinavia--such as Mickey Mouse, Snow White and Donald Duck--Disney owns theme parks in the United States and abroad, a professional hockey team, 400 retail stores, a record and book arm, the Disney Channel pay TV service and a television and movie studio with a rich vein of hits that include “Pocahontas” and “The Lion King.”
Created in a merger in March, 1985, Capital Cities/ABC owns the most profitable network, eight of the best-managed television stations in the country--which reach 25% of the nation’s viewers--21 radio stations, the ESPN sports cable networks, a gaggle of trade magazines and interests in cable networks, including Lifetime and A&E.; It has 225 affiliate broadcasters. Its newspaper group includes the Kansas City Star and the Ft. Worth Star-Telegram.
The companies have something of a history together. Murphy talked about teaming up with Roy Disney Sr. years ago. In 1953, then ABC Chairman Leonard Goldenson helped finance Disneyland. Eisner landed his first job in 1969 at ABC Entertainment, and joked at the press conference about his scheduling of soap operas when he was a programming chief there. Today, the popular Disney show “Home Improvement” airs on ABC.
“I always thought the combination was perfect,” said the 70-year-old Murphy, chairman and chief executive officer of Capital Cities/ABC, who will relinquish his title when the merger takes effect late next year and will join the Disney board. “And the idea of Michael ending up with CBS just killed me,” he said, alluding to the talks between Disney and CBS.
Under the agreement, Michael Eisner will remain chairman of Disney, with Robert A. Iger continuing as president of Capital Cities, which becomes a subsidiary of the Burbank-based company. Disney would become the first Los Angeles-based network owner. Eisner said management teams at the head of various operations would be kept intact.
“I knew deep down that to protect our company for growth and for excitement into the 21st Century, we would have to do something like this,” said Eisner, who said he finally struck the deal after running into Murphy at an exclusive conference of media executives in Sun Valley, Ida., two weeks ago. “And I knew deep down it had to be ABC. I just needed the right nightclub, the right song, the right music to culminate the deal.”
A tightly guarded secret until it was announced Monday morning in New York, the deal is likely to accelerate consolidation in the entertainment industry that over the last decade has funneled control into fewer hands. Brisk competition in Hollywood has brought producers of movies, books, TV shows and records under one roof and set off a race among them to own the retail outlets, cable systems, TV stations and networks that put those products into consumers’ hands.
The Disney marriage could trigger a frenzy of matchups and alliances, as companies like Turner Broadcasting Systems Inc., Sony Corp. and MCA Inc.'s new owner, the Seagram Co., seek homes for their products or risk losing leverage. It immediately pumped up the stock value of CBS Inc., the remaining independent television network, which has been in negotiations with Westinghouse Electric Corp. and could announce a deal this week.
“This is de facto acknowledgment that to compete in broadcasting, you have to align with a studio,” Dixon said. “Viacom and Time Warner have started networks and now Disney owns one. NBC and CBS have to think long and hard about going it alone.”
News Corp. owns a major studio and the fourth-largest television network, but the Twentieth Century name lacks the cachet of Disney.
Because the Westinghouse-CBS combination brings only distribution efficiencies rather than any programming strengths, many analysts expect other suitors to spoil that deal.
The expense of Capital Cities probably will prevent that from happening to Disney. “Not many companies can come up with $10 billion in cash to pay shareholders,” said Crawford.
Although Eisner could have paid substantially less for Capital Cities if he had sealed a sale during a round of negotiations between the two companies last year, Crawford called the deal “reasonably priced.”
Entertainment companies and television stations have been selling at prices between 10 and 14 times cash flow. This deal, which values Capital Cities at $122.37 a share, brought a multiple of about 10 1/2 times this year’s cash flow.
Under the deal, Capital Cities’ shareholders will receive $65 in cash and one share of Disney stock for every share they hold. Disney takes on $10 billion in debt, leaving the companies about half as leveraged as Time Warner. “Neither company had a lot of debt so they can pay out, no problem,” Dixon said.
While Dixon said the company does not need to shed assets to pay down debt, some analysts raised the possibility that Disney might sell Capital Cities’ newspaper group, which one of them said “really doesn’t fit with what they are doing.”
And though regulatory problems are minimal, the companies each own television stations in Los Angeles. Under existing rules, no company can own more than one station in a market. Analysts predicted that Disney would sell its station, KCAL.
Television executives say Eisner had gotten cold feet during talks in the past, worried that a major acquisition would weaken Disney’s stock price. The company, after all, had its fair share of bad news in the last few years, with its theme park outside of Paris flopping, plans for a park outside Washington scuttled and a series of bruising management defections taking their toll.
The company’s well-regarded president, Frank Wells, died last April; Jeffrey Katzenberg, its studio head, left to form DreamWorks SKG last summer, and its head of television, Richard Frank, quit this spring.
Executives close to Eisner said the formation of the two new networks by rival studios and the changing rules of the network game made it clear that securing distribution of his products was key. Under new regulations, the networks can make shows and sell them into the lucrative syndication market. That means potentially fewer time periods for Disney shows. Disney is the third-largest TV production studio, after Warner Bros. and Sony’s Columbia Tristar.
With time slots for syndicated shows drying up, in fact, Viacom’s Paramount studio has used its new United Paramount Network as a place to stock shows that it would otherwise have sold into syndication, according to Jeffrey Logsdon, an analyst at the Seidler Companies.
Eisner said that the company would not make programming decisions at ABC based on who owns the shows. But most analysts expect Disney shows to get favorable treatment.
“Over time, a decent portion of the programming on the network could be from Disney, I’d say something like half,” said Crawford.
In addition to the network outlet, Dixon and Crawford point to another important asset of the Capital Cities purchase: a depth of management that can help fill the gaps at Disney left by recent departures.
What is more, the two companies have the winning ticket to attract buyers abroad. “If you are a foreign country worried about importing American ideology, the safest thing you can buy is sports programming and Disney,” Frank said.
Hofmeister reported from Los Angeles and Hall from New York.
More on the Merger
* EFFECT ON VIEWERS: Disney and Cap Cities say they expect few changes in prime time for now. D1
* FAIR DEAL: Analysts called the price reasonable and the potential synergies tremendous. D1
* BIG WINNER: Billionaire Warren E. Buffett stands to make a pretax profit of $2.1 billion. D1
* ADDITIONAL COVERAGE: D4-D6
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A Show Business Marriage
The deal between the Walt Disney Co. and Capital Cities/ABC Inc. would make Cap Cities a subsidiary of Disney and create the world’s largest entertainment company. The deal combines the leader in fantasy entertainment with the No. 1 television network.
DEAL AT A GLANCE
* What They’ll Pay: Capital Cities shareholders receive one share of Disney stock and $65 in cash for each of their shares.
* Who Will Run It: Disney’s chairman, Michael D. Eisner, remains as chairman and chief executive.
* What Must Happen Now: The acquisition, already approved by the boards of both companies, is subject to shareholder approval and federal antitrust review.
BIGGEST MEDIA MERGERS
Target Buyer Value (in billions) Cap Cities/ABC Disney $19.0 Warner Time Inc. $14.1 Paramount Viacom $9.6 Blockbuster Viacom $8.4 MCA* Matsushita $7.4
* MCA was acquired again in 1995, by Seagram Co.
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When it’s finalized sometime next year, Walt Disney’s $19-billion buyout of Capital Cities/ABC Inc. will be the fourth-largest worldwide merger.
10 BIGGEST MERGERS
Target Buyer Value Year Bid (in billions) Bank of Tokyo Mitsubishi Bank $33.8 Pending Friendly RJR Nabisco Kohlberg, Kravis Roberts $26.4 1989 Hostile Taiyo Kobe Bank Mitsubishi $22.8 1990 Friendly Cap Cities/ABC Walt Disney Co. $19.0 Pending Friendly Wellcome Glaxo Holdings $14.3 1995 Hostile Warner Time Inc. $14.1 1990 Friendly Kraft Inc. Philip Morris $13.4 1988 Hostile Gulf Oil Standard Oil of Calif. $13.4 1984 Friendly U.S. West Inc. Airtech Com. $13.3 Pending Friendly Nynex Cellular Bell Atlantic $13.0 Pending Friendly
BIGGEST MEDIA COMPANY MERGERS
Target Buyer Value Year Bid (in billions) Cap Cities/ABC Walt Disney Co. $19.0 Pending Friendly Warner Time Inc. $14.1 1990 Friendly Paramount Viacom $9.6 1994 Friendly Blockbuster Viacom $8.4 1994 Friendly MCA Matsushita Electric $7.4 1991 Friendly MCA Seagram Co. $5.7 1995 Friendly
Source: Associated Press