Too much to bite: Why an Apple purchase of Disney is (probably) too much (2024)

There has been a lot of speculation recently that Apple may be a potential buyer of Disney. The argument goes that (1) with Disney facing structural questions over its future (2) Apple looking to expand more into streaming and (3) possible other connections e.g. Disney CEO Bob Iger past representation on Apple’s board (although that was four years ago), there is a strategic rationale to such a deal. It is a (fairly) persuasive argument, but I think it will not happen. I will outline the reasons below.

1. First, what would be the arguments for Apple buying Disney? They seem obvious. Disney looks like a very valuable asset, with a massive back film and programming catalogue, one of the world’s largest streaming services, including a sizeable presence in India where many western companies have failed to penetrate, a substantial network of theme parks and, finally, ownership of ESPN, the prized (mainly) US sports franchise which many regard as the crown jewel of Disney. Finally, to state the obvious, there is the name. It is, in many ways, unique even if it has peers in every area in which it operates. A deal would probably be earnings accretive post-restructuring (although that would depend on how Apple structured a deal) and diversify Apple’s revenue streams. Despite all of this, there are very good reasons why Apple is unlikely to bid.
2. First argument against - the size of any potential deal. Disney’s market capitalisation is $149bn as of September 4th 2023. Apple would have to pay a premium to persuade shareholders to sell. Assuming a 50% premium (which is reasonable given Disney’s weak share price performance in recent years), Apple would therefore have to pay c. $215bn to buy Disney’s shares, In addition, Apple would have to pay $35.7bn (at June 30th) for Disney’s net debt. Therefore, a ballpark figure for Apple to buy Disney would be $250bn. To put in context, that would be over c. 3.5x larger than Microsoft’s planned c. $70bn deal for Activision Blizzard.
3. Theoretically, Apple can do such a deal. Its market capitalisation is $3 trillion on a fully diluted basis so over 20x that of Disney. On June 30th 2023, it had net debt (i.e. total cash and equivalents less total debt) of over $43bn, which is miniscule given its cashflow (Apple generated nearly $90 billion in operating cash flow in the last quarter) so leverage would not be an issue (a deal would take Apple’s net debt / EBITDA ratio to just over 2x on a pro-forma basis (i.e. with Disney's EBITDA included) using assumptions above, which is more than manageable. If Apple felt that was too much of an issue, it could always resort to listing additional shares to fund a Disney purchase. Apple would clearly have plenty of options.
4. However, it is one thing being able to theoretically do a deal and being comfortable with such a sizeable transaction. Such a deal would mean Apple using its cashflow to service and repay debt (and, given the rise in interest rates over the past 18 months, that is a major factor) which would presumably mean a reduction in returns to shareholders. Apple could go to the markets and try to find a deal via an additional equity listing but that would raise questions from its shareholders over both the deal and Disney’s strategic direction. It is easy to see why Apple may want to avoid such a scrutiny for the reasons cited below.
5. A second factor is the regulatory risk. As the Microsoft bid to acquire Activision has shown, the laissez-faire approach of a decade ago has given rise to greater scepticism and a determination to consider not just the current implications from any planned acquisition but also potential future outcomes. Moreover, as the Microsoft bid for Activision has shown, Apple would not only have to consider the attitude of US regulators (who, under Lina Khan at the FTC have taken a strident, if mainly unsuccessful so far, approach to limiting Tech’s power) but also international regulators such as the European Union and the UK’s CMA who are keen to make their mark (India may also be another potential hurdle given Disney’s ownership of Disney+
6. An Apple bid for Disney is likely to raise significant competition fears in several areas. Combining Apple’s financial firepower with Disney’s content and the likes of Disney+ (already one of the world’s largest streaming services), ESPN ( a bedrock of US sports rights) and majority ownership of Hulu (which has a major presence in the US SVOD market) would not only create the most powerful streaming player globally but also one with a huge content library and which could easily afford to outspend its rivals to achieve dominance. Apple is likely to be aware of the likely regulatory scrutiny.
7. That leads onto the third point, the political angle. Both Democrats and Republicans are more hostile to the power of the Big Tech companies than was the case five to six years (some of their concerns are mutual in nature, some reflect the political stances of their parties). By nature, Apple - and its CEO Tim Cook - are wary of being dragged in political companies. Apple already has faced significant criticism for its business dealings in China (LINK) and it is fair to say that it has done everything it can to downplay any political stance. Unlike some of its peers, neither the company nor Mr Cook has shown a willingness to wade into political battles.That would change if Apple was to acquire Disney.
8. A particular issue would be Florida. Disney has been involved in a very public spat with Republican Governor Ron DeSantis over cultural issues and Disney’s special rights in the state. Not only would Apple be pitching itself right into the heart of this but DeSantis may decide to gatecrash the deal, mainly for political reasons and either through political and regulatory actions. While such acquisitions are not usually dealt with at the state level, Disney’s special position in Florida may lead to an exceptional situation and pitch Apple into the political sphere.
9. That would tie in with the fourth point. Apple is, by nature (and ironically) a conservative company by heart, at least under the leadership of Tim Cook. It has not looked to make major acquisitions, unlike Microsoft (or Meta in previous years). It has not gone full in on streaming, instead taking a more long-term and relatively cautious approach. It has built up its services business (which were over a quarter of revenues in the last quarterly results) mainly via organic means. As outlined above, its debt policy is also conservative. The actions of Apple do not point to a company that is always on the hunt for the next new thing, more one that recognises the strong position in which it is and looks to defend that.
10. Acquiring even the theoretically best company in the world means this would be a substantial undertaking. However, very few would describe Disney as fitting into that category and that leads onto the fifth point, namely the significant challenges that Disney faces and whether Apple would feel competent or confident enough to take these on when it faces its own challenges (see below). As I have pointed out previously (LINK), Disney faces several major structural question marks when it comes to its businesses.
11. Where to start with these? First, streaming. Yes, Disney has cut Disney+ financial losses substantially over the past two quarters (losses for the unit were c. $0.5bn in the last quarter vs $1.1bn two quarters ago and $1.5bn three quarters ago) but it is still substantially loss making. More to the point, what is the wider strategic / end goal for Disney+? It is a question for all the major SVOD players, except for the likes of Amazon (where its aim - at least in the past - was to support the expansion of Amazon Prime and now possibly to grow advertising revenues) and Netflix, where streaming is its raison d’être. Yet, for the other players, this question has not been resolved and Apple would need to have a credible answer if it decided to acquire Disney.
12. Disney’s issues in the streaming space do not stop at Disney+. First, there is the enduring question of Hulu, which is majority owned by Disney but where Comcast’s NBC Universal has a 33% stake. Disney can buy the stake as early as next January for a minimum price of $27.5 billion. Apple would need to decide what to do here.
13. Finally, there are other major strategic decisions to be made. Would an Apple-owned Disney decide to keep the ABC TV network or, as Disney CEO Bob Iger has stated recently, see it as ‘non-core’? How would an Apple-owned Disney turn around the latter’s recent poor performance in film where Disney has underperformed its rivals (with some on the right claiming its movies have become too influenced by a cultural-political agenda)? What fresh ideas would Apple bring to the running of the Theme Parks and leisure businesses, in areas such as cruise lines. Disney has struggled - and is struggling - with these questions and it is not clear where Apple could provide fresh thinking.
14. Perhaps a more pressing issue is what to do with Disney’s marquee sports brand, ESPN, which faces increasing challenges as cord cutting in the US increasesand other major Tech giants such as Amazon, Apple itself and Google buy US sports rights, which have been the staple of ESPN’s business model. Apple would need (again) to have ready answers.
15. Apple’s management may feel as though they are up to the challenges, but they also face their own problems at Apple which need resolving and this leads onto the sixth point, namely Apple’s own strategic issues and its priorities.While its latest quarterly results met expectations, revenues fell 1% and the shares fell as the company stated it expected the current quarter’s revenues to also fall. Growth in the high-margin Services area is a (very) bright spot for the future but no business can ignore a mixed performance in its core area.
16. Then there are Apple’s own strategic priorities. One core focus is to continue the high growth in revenues (and profits) from the Services business. It is not clear how acquiring Disney would fit into that priority (and may hinder it if it leads to greater regulatory scrutiny). Another area is Apple’s recently announced plans on Virtual Reality. While some link may be made with Disney’s existing content and / or, let’s say, to take the customer experience in Theme Parks to another level, a simple direct link is not clear (and could be achieved, in any event, with a content deal and / or partnership). Thirdly, like with all major Tech players, Apple is looking to grow its AI capabilities. How would a Disney acquisition fit into this world view?
17. A better option may be for Apple to take a substantial but not significant stake in Disney (say 10%) and form some sort of strategic partnership around areas such as content. This would have advantages for both parties but without the risks of an acquisition. For a start, Apple taking a stake should boost Disney’s share price as it would be seen as both a mark of confidence in the business and raise hopes of a full deal at some point in the future (it would also help Disney’s balance sheet). Disney could help provide content for Apple’s own streaming services and / or even merge the two services together in a single offer that would prove a formidable player in the SVOD market. Moreover, an alliance between Apple and Disney’s ESPN business would prove a ‘win-win’ situation, given the former’s cash pile and the latter’s brand and still formidable ownership of rights.
18. In conclusion, there seems too many obstacles to a full Apple takeover of Disney. That is not to say it cannot happen - as pointed out above, Apple does have the financial firepower for a deal - but that it is very unlikely, especially when one considers Apple’s conservative behaviour. However, there is a logic to some sort of deal being made between the two parties and, if something does happen, that is the most likely course of action and the one that makes the most sense. That may be a deal that may be easier for Apple to swallow, and which does not, to borrow from Snow White, prove to be a poison apple.

As usual, this is not investment advice.