Disney price too low to make any magic

Institutional investors in both Walt Disney Co. and Comcast Corp. are finding little magic in a potential merger of the two companies.

"As someone who owns both stocks, it's hard to see how we would gain from a merger unless the deal gets done really quickly and those revenue streams get going," said Tom Vanderventer, managing director at Smith Barney Asset Management, Stamford, Conn.

Mr. Vanderventer supports a deal if the price is right, but he doesn't want to see Comcast overpay, and he's not sure it's the best use of Comcast's capital. Smith Barney's growth funds owned 9.3 million shares of Comcast and 5.4 million shares of Disney as of Jan. 31, according to mutual fund research firm Morningstar Inc., Chicago.

Said Rob Gensler, portfolio manager of the Baltimore-based T. Rowe Price Associates Inc. Media and Telecom fund: "Comcast shareholders have to ask why they need to do this deal at all. Would the combination of the two companies offer greater growth prospects? Maybe Comcast's growth prospects aren't as great as we thought." T. Rowe Price owned 20.9 million Disney shares and 9.6 million Comcast shares as of Sept. 30, according to ShareWorld.

Anthony Gennaro, equity analyst at Principal Global Investors, Des Moines, Iowa, which owned 1.3 million Disney shares and 1.5 million Comcast shares as of Sept. 30, sees Disney needing $30 a share for the deal to go through. Comcast offered $26.47 per share in its surprise Feb. 11 bid for Burbank, Calif.-based Disney.

"A lot of what happens will depend on what Comcast's stock does. It could recover and they could offer more. It's tough to say how far they'll go, but the general speculation is that they might offer a share of Comcast for a share of Disney," Mr. Gennaro said. Comcast's offer was 0.78 share of Comcast stock for one share of Disney stock.

He supports a merger if Comcast finds a way to give Disney full value around $30 to $31 a share and at the same time gets its own stock price up by telling its story better. Comcast was trading around $30 last week. It closed at $33.20 on Feb. 10, the day before the offer; it fell as low as $29.75 on Feb. 13.

"The way Disney has been trading around $26 a share means the market is saying that the deal won't get done unless Comcast ups its offer," said Smith Barney's Mr. Vanderventer.

"Comcast could increase the exchange ratio to something higher, or offer some combination with cash," Mr. Vanderventer said. "If Comcast does that, it would be dilutive to its stock, so the deal doesn't get done at all, because the Comcast price keeps going down. We worry that could happen."

Mr. Vanderventer believes a fair price for Disney would be $27 to $32 a share. And for now, he is sticking with his positions, noting he considers both companies attractive.

Although Comcast officials last week insisted the company won't raise its bid to acquire Disney, most managers interviewed expect the Philadelphia-based cable company to increase its offer, rather than walk away from its chance to acquire the Magic Kingdom.

Industry watchers agreed the Comcast offer was just the opening salvo and it needed to go higher if it is to be taken seriously.

"That offer of 0.78 a Comcast share for a share of Disney isn't for real. It has to be north of a share for it to be a full and fair offer," said T. Rowe Price's Mr. Gensler.

Disney has everything going its way, Mr. Gensler added. "Their theme parks and hotels are getting better. They've had good results in their other divisions. The economy has been helping them. To the extent (Disney CEO Michael) Eisner wants to be independent, time is his friend. He is not in a decaying situation at all. If he does want to sell, it should be at a higher price."

Mr. Gensler believes the possibility of a deal is good for Disney shareholders because it's spurred the price jump, but isn't so sure it's a boon to Comcast holders.

He speculated Comcast could be afraid of the Internet marginalizing its business. "Disney's vision for the future is that down the road people will be getting much of their content on the Internet via streaming video, not through cable. Comcast says it's ‘the king of the pike.' The truth is probably somewhere in between," Mr. Gensler said.

Connecticut Treasurer Denise L. Nappier, who oversees the $18.5 billion State of Connecticut Retirement Plans & Trust Funds, Hartford, expressed concerns about the possible merger and how it would affect the state's economy. The pension fund owns nearly $20 million in Comcast stock and $12.9 million in Disney stock, according to Bernard Kavaler, spokesman for the treasurer.

In a news release, Ms. Nappier said she wants assurances from Comcast's Chief Executive Brian Roberts that he will keep Disney's ESPN headquarters in Bristol, Conn., if the deal goes through. Around 2,000 ESPN workers are based in Bristol. Mr. Kavaler also said Ms. Nappier isn't taking any position on the merger until she hears Comcast's plans for ESPN headquarters. The system is not buying or selling either stock at this point, he said.

Christopher Ailman, chief investment officer at the $103.2 billion California State Teachers' Retirement System, Sacramento, said he believes the offer should be higher, although he didn't name a figure. He also said he was disappointed that the Disney board asked management to review the offer rather than seek an independent review. As of Jan. 31, the system owned nearly 8 million shares of Disney, 8 million Class A shares of Comcast, plus 422,800 "special" Class A shares of Comcast, according to a spokeswoman for CalSTRS.

Principal's Mr. Gennaro added that a lot of Comcast shareholders are worried the combined company doesn't offer as many synergies as Comcast presented in its offer.

Comcast is interested in reshaping the way content is delivered, especially popular TV shows. But Disney's American Broadcasting Co. network revenues come from advertising, and if programming is available through a video-on-demand technology, it would fragment the audience and cause ABC to lose important revenue streams, Mr. Gennaro pointed out. He noted that advertisers also are worried about that possibility.

"Many new television shows are launched by airing them right after hit shows, but video on demand would make it difficult to launch new shows. Video-on-demand technology is one of the biggest threats to ABC, which can't be further fragmented," he added.

On the plus side, having access to ESPN would allow Comcast to "force the satellite companies such as Echostar and DirectTV to pay more for it or to lose their diehard sports fans, so there are real synergies there," Mr. Gennaro said.

There would be some immediate cost synergies, getting certain operations such as ABC to perform better, said Mr. Vanderventer of Smith Barney. Down the road there would be other opportunities, such as the creation of new content, new cable channels and new forms of distribution. Disney's board would probably point to these, saying they reflect the value of the franchise. And Comcast executives probably wouldn't identify those opportunities at this point because that would mean they should be paying more, he said.

Meanwhile, John Riazzi, CEO at Transamerica Investment Management LLC, Los Angeles, which owns 225 million shares of Disney and no Comcast shares, makes no bones of his opposition to the merger: "I'm a firm believer in the value of content, and not in distribution.

"Disney shareholders would not be well served in being tied to a distribution company. In the long run, a merger would detract from the overall value of Disney's underlying assets."

If the deal should go through, Mr. Riazzi said he would tender his shares and liquidate his position. He believes Disney is worth $37 to $40 a share, and expects it could reach that with a change in management.

A change in management is just what Roy Disney, nephew of company founder Walt Disney, and supporters have been seeking. They are leading an effort to oust Mr. Eisner, but so far the board has supported the CEO. Mr. Riazzi said he will withhold his vote for Mr. Eisner at the annual meeting, scheduled for March 3 in Philadelphia.