Needham analyst Laura Martin has been beating the drum loudly that Walt Disney (NYSE:DIS) will be sold over the next 36 months. According to Martin, one of the leading contenders to buy the house that Walt built is Apple (NASDAQ:AAPL), the world’s largest company. An Apple and Disney merger would certainly create significant investor interest.
There is no question that Apple could afford to buy Disney.
The big question is whether Apple CEO Tim Cook would be interested in such a big acquisition. As far as I know, Apple’s largest acquisition was Beats Electronics. It paid $3 billion in 2014 for the headphones and speakers manufacturer. The next largest by dollar value was Intel’s (NASDAQ:INTC) smartphone modem business in 2019. The iPhone maker paid approximately $1 billion.
Even with Disney stock down 23% over the past five years, it still has a hefty market capitalization of $157 billion and an enterprise value of $200 billion, 67x its largest acquisition to date.
If Apple hadn’t borrowed so much in recent years to buy back its stock — Apple’s long-term debt as of April 1 was $97.0 billion compared to $0 as of Sept. 29, 2012 — the decision would be much easier.
I agree with Martin’s assessment that Apple makes sense as a suitable buyer. Here are three reasons why.
Apple Has More Money Than God
Tim Cook became CEO of Apple in August 2011 after Steve Jobs became too ill to run the company. Jobs died two months later. The CEO received $376 million in stock awards for his new pay package. That’s a massive amount, yet it only accounts for less than 1% of the net debt on its balance sheet.
As I said, Apple has more money than God.
“Outside of fundamentals, we do believe Disney will be purchased during the next three years… Takeover premiums have historically been 30% -40% above the public trading price for media companies,” The Street reported Martin’s comments.
Assuming Apple pays 30-40% more than Disney’s current market cap, that’s $220 billion at the high end of Martin’s estimate.
Apple’s long-term debt is 3.2% of its $3.04 trillion market cap. If it were to finance 100% of the purchase price with new debt, that would up the percentage to 10.4%. That’s still very low. By comparison, Warren Bros. Discovery’s (NASDAQ:WBD) long-term debt of $45 billion as of March 31 is 152% of its $29.9 billion market cap.
With Apple’s many different revenue streams, there is no comparison.
And even when you add Disney’s $45 billion in long-term debt to Apple’s balance sheet, the debt of $362 billion [$97B (existing debt) plus $220B (purchase price) plus $45B (Disney’s debt)] would be 11.9% of its current market cap.
Of course, that market cap doesn’t consider Disney’s plentiful assets, so the actual percentage is much lower.
Iger’s Not Getting Any Younger
On July 12, Disney announced that Bob Iger had signed a two-year contract extension with the company to see him remain CEO through 2026. The move pleased Wall Street as it brought some stability to a precarious situation at the company.
“It likely takes a bit of an overhang off the stock, given that Iger is now over halfway through the first year of his original two-year tenure, but it also reinforces the notion that Disney continues to have serious succession planning issues,” The Hollywood Reporter quoted TD Cowan analyst Doug Creutz’s comments about the move. “We continue to believe that Disney’s challenges are structural in nature and not easily solved.”
Creutz also reminded his clients that Disney is searching for a new Chief Financial Officer to replace departed CFO Christine McCarthy, who served for over eight years and worked at Disney for 23 years. This is key to the Apple and Disney merger.
Trying to find a new CEO and CFO simultaneously would have been a tough undertaking. This extension gives Iger time to find the right leader to handle the next phase of the company’s transformation.
The big question will be what Disney looks like when that CEO is hired.
Apple Is a Services Business
As much as Apple is known for its iPhone, the reality is that it’s become far more services-oriented under Tim Cook. The company’s non-manufacturing revenues accounted for 22.0% of its overall revenue in Q2 2023, 160 basis points higher than a year earlier.
Even more importantly, its services business grew revenues by nearly 6% in the second quarter, while its products revenue saw revenues decline by 4.6%. Services have become the great equalizer and balancing act for Cook and the company. It didn’t have that a few years ago. It can now absorb a down quarter from its key products such as the iPhone.
Which is why buying Disney would be a smart move by Cook. This is key to the Apple and Disney merger.
In addition, the Disney Parks, Experiences, and Products division could be leveraged by Apple to an even greater extent than what Disney is currently doing to cross-sell.
In the latest quarter, the division had an operating margin of nearly 28%. That’s almost 4x higher than the operating margin for its Disney Media and Entertainment Distribution segment at 8.0%.
In March, Martin said that the two companies together would be worth more than separately.
“We believe that great content and a strong distribution footprint are complementary networks,” Morningstar.com reported Martin’s comments from a note to clients. “That is, both are worth more if they have the other.”
Apple brings the distribution — 1.25 billion customers — while Disney brings the content.
The only problem: Disney needs Apple a lot more than Apple needs Disney.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
