Superheroes Join Forces With Disney XD

The Walt Disney Co.'s $4 billion play for superhero factory Marvel Entertainment may have been mostly skewed toward the strength of its film studio — which has had recent blockbuster hits like Iron Man, X-Men and Spider-Man 3 — but the deal also provides more raw material for its Disney XD cable network.

On a conference call with analysts Aug. 31, Disney CEO Robert Iger said that the two companies are still working out the particulars of the merger, but that Disney XD — the recently rebranded Toon Disney — represents one of the biggest opportunities for the merger. Iger said Disney XD currently airs about 20 hours per week of Marvel character productions and that could expand both domestically and internationally.

Disney rebranded Toon Disney as Disney XD in February in an effort to attract a young male audience. That demographic also happens to be Marvel's biggest audience.

“This is a channel that is aimed primarily at boys and one we are really excited about, not just because of its success recently, but because of its reach,” Iger said on the conference call. “We have great reach in the United States and as we rebrand our global family channels to Disney XD, the reach will grow even more.

“We actually have been looking to license more Marvel content for that channel in the future and this will provide a great opportunity to do that,” he added. “At the same time, that kind of reach from a distribution perspective gives us that ability to expose these characters to people all over the word in a way that Marvel was only able to get in the past by going to a third party.”

In a research note, Miller Tabak media analyst David Joyce wrote that Disney has had its biggest successes catering to the young female markets with programming like the High School Musical franchise. The conversion of Toon Disney to Disney XD was recognition of its need to rebalance and broaden its exposure and the Marvel deal plays directly into that strategy.

“Disney, therefore, will likely leverage Disney XD domestically and other ABC Family/Jetix properties worldwide to help bolster its distribution and development of Marvel characters,” Joyce wrote. “Licensing would therefore also benefit, as Marvel garners [less than] 50% of licensing overseas vs. [more than] 50% for Disney.”

The deal will give Disney access to the more than 5,000 characters in the Marvel fold, as well as its comics publishing unit. Although several of the more popular characters are already tied up in film distribution deals with other movie studios — including Paramount, Sony Pictures and Fox — Disney said that there is tremendous upside potential.

“This is a big library of properties,” Disney chief financial officer Tom Staggs said on the conference call. “We think there is real opportunity, and one of the things we will set to work on once we close the transaction is evaluating where those opportunities are greatest and how we can leverage them across both the existing Marvel infrastructure and Disney.”

Iger also dismissed any notions that the deal means that Disney is moving away from new content and characters generated in-house to acquiring them from outside sources.

Iger said on the call that Disney has been concentrating on its own brands and has also shown interest in brands outside the fold that could have attractive returns over time.

He added that he saw the Marvel brand as being akin to Disney's in many ways and that the Disney platform could be used to strengthen the Marvel properties.

“But the goal here is not to rebrand Marvel/Disney, in fact, the opposite — to put an even brighter spotlight on Marvel as a brand and to really work with the Marvel team to help grow it more,” Iger said.

According to the deal, Marvel Entertainment shareholders will receive $30 in cash and 0.745 shares of Disney stock for each share they own. The deal is valued at about $50 per share, and based on Marvel's closing price of $38.65 per share on Aug. 28, represents a 29% premium. In contrast, Disney's $7.4 billion acquisition of animation giant Pixar in 2006 represented about a 4% premium.

On the conference call, Staggs said that the premium for Marvel was warranted for several reasons.

“I'm a very big fan of trying to buy premium assets at bargain prices, but it does not happen very often,” Staggs said. “And I think it is important to know that Marvel is a company that was in a very strong position: In a strong business position, they are in a strong financial position — this is not a deal that they had to do. Nor was it a deal that Disney had to do. But, as we spoke, it became clear to both sides that we could create more value through a combination.”

Marvel shares soared on news of the deal, rising 25.2% ($9.72 per share) to $48.37 each on Aug. 31. The stock fell back slightly, closing at $47.41 on Sept. 2. Disney shares were down 80 cents each (3.3%) to $26.04 on Aug, 31, and continued to slide to $25.40 each on Sept. 2.