Analyst: A Disney-21st Century Fox Deal 'Makes Strategic And Financial Sense'

Walt Disney Co (NYSE: DIS)'s prior talks to acquire some or all of Twenty-First Century Fox Inc (NASDAQ: FOXA)'s media assets ended with no agreement being made, but the two companies have since returned to the negotiating table, The Wall Street Journal reported.

The Analyst

Rosenblatt Securities' Alan Gould maintains a Buy rating with a $40 price target on Fox's stock and a Neutral rating with a $115 price target on Disney's stock.

The Thesis

Traditional media empires are scrambling to optimize a balance between sustaining their cash flow from their existing ecosystem while simultaneously positioning themselves for the future of media and entertainment, Gould said in a Monday note. (See Gould's track record here.) 

Fox would help Disney achieve this objective for the following reasons, Gould said:

• Its stake in Hulu, which gives incremental control of a leading streaming provider.
• Notable brands including "Avatar," the original "Star Wars" film and "The Simpsons."
• European and Indian exposure, which offers international growth opportunity.
• Incremental scaling power.

Fox shareholders would also benefit from the potential horizontal merger, as its subscale studio and cable networks would help Disney become a "larger and better positioned" media giant, Gould said. 

Finally, an acquisition of Fox's assets fits in with Disney's 2011 commentary on future M&A deals, the analyst said: Any deal must make Disney's product better and more compelling at a favorable price — and generate upside value to shareholders.

"We believe Disney buying the Fox assets makes strategic and financial sense," Gould said. 

Price Action

Shares of Fox were trading higher by more than 1 percent ahead of Monday's market open, while Disney's stock was trading higher by around 1 percent.

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