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Get Four
|  | JANUARY 17, 2006
By Ronald Grover About That Jobs to Disney Script...Hollywood is buzzing about a big deal. Maybe, but the odds of Apple's boss actually becoming Mouse House chairman are more likely fantasyIn a town that often makes a bundle from fantasy, perhaps no bit of yarn-weaving is as hot these days as the buzz among Hollywood moguls that Apple (AAPL ) CEO Steve Jobs will soon be chairman of Walt Disney Co. (DIS ). Sure, it could happen. Talks between Disney and Jobs's other company, Pixar Animation Studios (PIXR ), have been dragging on for months, and at least one iteration of the deal has Disney buying some or all of Pixar and making Jobs Disney's largest shareholder. From there, he could get a board seat and potentially be put at the head of the table. Don't bet on it. Buying Pixar would cost Disney a bundle, maybe $8 billion or $9 billion and could send Disney's stock into a tailspin. When the rumor first surfaced on Jan. 4, the share price promptly dropped 1.5% in the 45 minutes before the market closed that day. A deal of that size would be a huge drag on Disney's earnings, figures Merrill Lynch analyst Jessica Reif Cohen, who projects the deal would dilute 2006 profits by 10% if it were struck at $60 a share, or by 13% at $70 a share. (Pixar traded at $56.28 in morning trading on Jan. 13.) WELL-TIMED HITS. "It's a near absurdity that Disney will buy Pixar out," says David Harris, an analyst with Sanders Morris Harris, who believes it will opt instead for a deal that would extend the two companies' 14-year deal for Disney to distribute Pixar's films -- although with the economics shifted heavily in favor of Pixar. Keeping Pixar in the Disney fold is likely crucial to Disney. The six films that Jobs & Co. have produced and Disney has distributed, including Toy Story, Monsters, Inc., and The Incredibles, have all been blockbusters, and came at a time when Disney's own fabled animation studio was struggling to find a hit. Disney had a good-size success, but far from a blockbuster, in Chicken Little. However, no one is certain if that means its animation studio is back (see BW Online, 11/8/05, "Chicken Little's News for Pixar"). Moreover, Disney is brilliant at marketing the films and leveraging them throughout the Magic Kingdom, from made-for-DVD movies and TV shows to rides at its theme parks. And Disney's new CEO Bob Iger gets on well with Jobs -- an entirely different situation than the gasoline-and-flame relationship between Jobs and Iger's predecessor, Michael Eisner (see BW Online, 9/30/05, "How Eisner Saved the Magic Kingdom"). LOST ACTION. The deal that Miller and others envision would go something like this: Pixar, which now splits the costs with Disney and gets roughly 40% of the revenues, would pay for the movies from the $1 billion or so on its balance sheet, give Disney a smallish fee or maybe 8% of the revenues to distribute it, and keep the rights to make sequels. Iger is in something of a tight spot. His stock, which has started to rise during his three months on the job, is still underperforming and could use the pop he would get from an extension of the Pixar deal, which expires this summer when it delivers its last film, Cars. Still, he doesn't want to give away the store to Jobs, and an agreement with Pixar would have two downsides for Disney: It would have to give up a huge piece of the action, and it would be ceding a prime slot in its summer lineup where it could be making far more money on one its own films. "This deal has to make sense for both companies," Iger told BusinessWeek a few weeks back. "We will not make a deal that we can't live with." Both Disney and Pixar declined to comment. "ENTIRELY INTERTWINED." And give Iger credit. He has been nurturing a relationship with Jobs by making Disney the first Hollywood studio to offer TV shows and other content for Apple's video iPod to sell to the public. And who knows, Iger may want to bring Jobs into the Mouse House. TCW analyst Miller can see a deal in which Disney buys a piece of Pixar to ensure continued distribution of its films and makes Jobs a large Disney shareholder and gives him a board seat. No one would argue that Jobs wouldn't bring a certain star quality -- not to mention some first-class brains -- to the Disney board. "He knows the media side of the business and is a technology visionary," says Anthony Valencia, an analyst with TCW, which owns roughly 9.9 million Pixar shares, or 17.1% of the company. "And at a time when after hearing about convergence of technology and the media for so long, the two are completely and entirely intertwined." In fact, Jobs has it all -- the marketing panache that a media company requires and the ability to understand the technology crosscurrents that media outfits need to traverse in the coming years to bring their content to increasingly hard-to-reach consumers. The same brilliance that brought America the iPod could help Disney figure out how to make its movies and TV shows on-demand and everywhere at just a time when some foresight is crucial (see BW Online, 11/14/05, "Behind Those Video-on-Demand Deals"). MERCURIAL GUY. Of course, some good ideas are just too good to happen. And more often than not, personal ambitions and preferences enter into the talks, especially when Jobs owns 50.6% of Pixar and can do pretty much what he wants. He doesn't want to sell the company he has nurtured from the struggling outfit he bought from George Lucas in 1986. "It's his baby," says Valencia. And Jobs hardly needs the dough. Others say the culture at Pixar, where folks work miles from Hollywood, could be harmed by melding its more freewheeling style with the more corporate life at Disney. On top of all that, it would be difficult to see Jobs sitting through hours of meetings over which new theme park ride to put in Disneyland or how to improve sales of Mickey Mouse dolls in Germany. And while Disney has an opening for chairman of the board -- it recently extended outgoing Chairman George Mitchell's tenure through yearend despite his retirement announcement -- Jobs is a mercurial guy who doesn't always play well with others. After months of controversy during the last gasp of the Eisner era, the Disney board is working harmoniously and may not want to add another firebrand member. Still, Hollywood is a place that lives for the surprise ending. And as the Disney board prepares for a Jan. 23 meeting at which it's expected to make a go, no-go decision on the kind of deal it wants to strike with Pixar, anything could happen. ELEVATION? Jobs had said he wanted an agreement in place by the end of December, and he has been talking with other studios in case he and Disney can't agree. But the two sides continue to talk. That could mean progress and a new agreement between the two. It could also mean a sale and perhaps even the elevation of Jobs to a Disney board seat. Stranger things have happened, although not that many. Who knows -- maybe Jobs secretly wants to be the Lion King.  Grover is BusinessWeek's Los Angeles bureau
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