Bloomberg News

Disney $4 Billion ‘Star Wars’ Deal Spotlights Content Bet

October 31, 2012

Disney’s $4 Billion ‘Star Wars’ Deal Spotlights Iger’s Bet

Mark Hamill, Carrie Fisher, and Harrison Ford in Star Wars, 1977. Photograph: Lucasfilm Ltd./Everett Collection

Walt Disney Co. (DIS:US) agreed to buy George Lucas’s Lucasfilm Ltd. for $4.05 billion, pressing Chief Executive Officer Robert Iger’s $15 billion bet on creative franchises by adding “Star Wars” and “Indiana Jones.”

Lucas, 68, the sole owner, will get half in cash and the rest in stock, making him a major investor in the film, theme park and TV company, according to a statement yesterday from Burbank, California-based Disney. The first of a new trilogy of “Star Wars” films will be released in 2015, Disney said.

The deal furthers Iger’s pursuit of marquee content in an era marked by technology changes, such as $8-a-month video streaming and free game downloads, that disrupted Hollywood’s traditional revenue sources. Iger, who paid a combined $11.2 billion for Pixar and Marvel, said memorable characters will be valuable no matter what medium they appear in.

“Technology has proved more friend than foe to great storytelling,” Iger said in an interview. “It allows us to distribute in ways we never thought would have been imaginable.”

Disney paid $7 billion for animation studio Pixar in 2006 and bought Marvel Entertainment in 2009 for $4.2 billion, adding the creators of “Toy Story,” and “The Avengers” to the company’s library.

The Lucas acquisition brings the “Star Wars” pictures, which have generated $4.54 billion in worldwide ticket sales -- second only to Warner Bros.’ “Harry Potter,” according to Box Office Mojo. The “Indiana Jones” films have collected $1.95 billion.

‘Sustainable Franchise’

“If Disney is really trying to focus on the tent-pole, event pictures, and given that this is something that has huge carryover value in the parks and merchandise business, it certainly makes sense,” said Matthew Harrigan, an analyst at Wunderlich Securities in Denver. “This is just the paradigm of the sustainable Hollywood franchise.”

Disney were little changed at $50 at 9:59 a.m. New York times, the first trading day since Oct. 26 after Hurricane Sandy forced markets to shut down this week. The stock had gained 34 percent this year before today.

Lucas, who will be a creative consultant on “Star Wars” films, will receive about 40 million Disney shares, becoming the second-largest non-institutional shareholder with about 2.2 percent of the company, data (DIS:US) compiled by Bloomberg show. The largest is the trust of late Apple Inc. (AAPL:US) co-founder Steve Jobs, who sold Pixar to Disney.

Talks between Disney and Lucas began a year and a half ago, Iger said yesterday on a conference call.

‘Retirement Fund’

“I’m investing in Disney, that’s my retirement fund,” Lucas said in a video Disney posted on Youtube. Lucasfilm was advised by the law firm Latham & Watkins.

Kathleen Kennedy, co-chairman of Lucasfilm with its founder, will become president of Lucasfilm, reporting to Walt Disney Studios Chairman Alan Horn, according to the statement. On the call, Disney executives said they had no plans to develop Lucas films other than “Star Wars.”

Kennedy, who co-founded Amblin Entertainment with director Steven Spielberg and produced “E.T.: The Extra-Terrestrial” and “Jurassic Park,” may expand the business, said Jeff Gomez, president of Starlight Runner Entertainment, a New York-based producer and adviser on film and video-game projects.

“Kathleen makes movies, she puts out product,” Gomez said in an interview. “I have every reason to believe she’s going to put out more product, and create new franchises on multiple media platforms.”

Effects, Games

With the acquisition, Disney also obtains Lucas’s Industrial Light & Magic, the pioneering shop that gave “Star Wars” its dramatic visual appeal and made advanced special effects a must-have feature in adventure films. On the call, Iger said he intends to keep the business.

The purchase may boost Disney’s money-losing interactive unit by adding LucasArts, home to video-game titles including “Lego Star Wars,” “Star Wars: The Force Unleashed” and “Star Wars: Battlefront.” The company recently announced a collaboration on an “Angry Birds: Star Wars” game with Rovio Entertainment Oy.

Iger, 61, is reinventing Disney’s film business through acquisitions of popular animated and live-action characters.

“Marvel’s The Avengers,” the first film from that acquisition to be marketed by Disney, is the top movie of the year worldwide, with $1.51 billion in ticket sales, according to Box Office Mojo. The picture, Disney’s biggest ever, led to a 24 percent jump in profit in the quarter ended June 30.

Theme Parks

Iger is also using Pixar and Marvel characters as fodder for theme-park improvements, such as the Cars Land attraction that opened this year at the California Adventure park in Anaheim, California. Disney parks also feature “Star Tours” and “Indiana Jones” rides.

“The question is, could Lucasfilm have the same earnings power as Marvel,” said Brett Harriss, an analyst with Gabelli & Co., in Rye, New York, who has a hold rating on the stock. “It’s not a stretch to think that Lucasfilm could be as productive as Marvel.”

Lucasfilm will generate 25 percent of its revenue this year from its film library and a slightly higher percentage from consumer-product licensing, Jay Rasulo, Disney’s chief financial officer, said on the conference call. The balance comes from the company’s video games, effects and sound businesses.

In 2005, when Lucasfilm released the last “Star Wars” picture, the company generated $550 million in operating income, Rasulo said.

2015 Kick

The acquisition will dilute Disney’s earnings per share by “low-single digit percentage points” in the current fiscal 2013 and 2014 and add to profit the following year when the new picture is released, he said. The company plans to repurchase an amount of shares equal to the 40 million issued in the next two years.

Lucasfilm’s consumer-products revenue this year will be comparable to the $215 million Marvel generated in 2009, when Disney acquired it, Rasulo said, suggesting 2012 sales of about $860 million for all of Lucasfilm. Disney seeks to expand “Star Wars” merchandise beyond toys and sees international markets, now 40 percent of consumer-product revenue, as a growth opportunity, he said.

Hasbro Inc. (HAS:US) which holds the main license for “Star Wars” toys, sells about $140 million a year in related products, according to Sean McGowan, an analyst at Needham & Co. in New York. A hit film in 2015 could triple that, he said.

“The ‘Star Wars’ universe is immense,” McGowan said in an e-mail. “And the franchise has the potential be the biggest ever.”

To contact the reporters on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net; Michael White in Los Angeles at mwhite8@bloomberg.net

To contact the editor responsible for this story: Rob Golum at rgolum@bloomberg.net


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