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Fitch: Disc Decline No Concern in Disney’s Lucasfilm Acquisition

30 Oct, 2012 By: Erik Gruenwedel

Disney’s just-announced $4 billion acquisition of Lucasfilm marks the media company’s third major multibillion dollar brand purchase following the Marvel and Pixar transactions in recent years.

This begs the question: How can Disney afford the deal when it had $4.4 billion in available cash at the end of the second quarter (ended June 30), $532 million of which was held by the theme parks division?

Fitch Ratings said the transaction would have no effect on Disney’s credit or debt. The ratings service said the acquisition, which consists of $2 billion in cash and $2 billion in equity — the latter over a 24-month period — underscores Disney’s ability to consistently leverage and monetize its brands and characters across all aspects of its business, which benefits its operating profile and free cash flow generation.

In addition to the aforementioned cash, Disney’s liquidity at the end of the second quarter (June 30) was $4.5 billion available under two revolving credit facilities of $2.25 billion each; the first maturing in February 2015 and the second in June 2017.
Disney said it plans to bow the first Stars Wars reboot in 2015.

“These acquisitions enable [Disney] to exploit the acquired IP across its various channels (parks, consumer products) and to collaborate on future franchise development,” Fitch said in a statement. “Disney has previously worked with Lucasfilm to develop park attractions, although the acquisition will clearly improve [those] economics.”

Indeed, with Walt Disney Studios getting the entire Stars Wars film library in the deal, just how much incremental home entertainment revenue the studio can mine from a franchise that was released in its entirety, Stars Wars: The Complete Saga, last September remains to be seen.

Fitch expects Disney’s studio business to mirror its peers by remaining volatile with low margins given the hit-driven nature of the theatrical business. The service said the decline of DVD sales — heretofore the primary margin-driver for many films — is becoming less of a concern amid the growth of higher-margin digital distribution, notably transactional video-on-demand and electronic sellthrough.

“These businesses have exhibited a degree of resiliency in the recent sluggish macroeconomic backdrop but remain at risk in the event of a more severe economic downturn,” Fitch said.

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