Disney magic hasn’t exactly worked on Pixar
By Jeffrey Goldfarb and Grace Dai
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
Walt Disney boss Bob Iger has another Pixar hit on his hands. âMonsters Universityâ should provide an eighth consecutive animated lift to Disneyâs bottom line when it reports quarterly results on Tuesday. The upcoming âPlanes,â derived from Pixarâs âCars,â is bound to be a success, too. But a Breakingviews analysis suggests the studioâs value to the Magic Kingdom falls short of the $7.4 billion purchase price. High-priced deals for Marvel and Lucasfilm may also disappoint investors in the long term.
Sorting out Disneyâs relationship with Pixar was one of the first things on Igerâs agenda when he took over in 2005 and remains a hallmark of his tenure. Their lucrative co-production and distribution deal was on the rocks after Pixar Chief Executive Steve Jobs clashed with Igerâs predecessor Michael Eisner. The successful Weinstein brothers also were expected to decamp. Disneyâs own storied cartoon shop was struggling. The whole movie division was in trouble. Allowing Pixar to fall into a rivalâs hands only would have further weakened the companyâs position.
Buying Pixar was practically a necessity, one that brought more than just technology and a small library that included âFinding Nemo.â Jobs became Disneyâs biggest shareholder and a director. Pixarâs creative force, John Lasseter, also infused Disney with a fresh spark. To acquire all that from a position of weakness, Disney paid over the odds at an estimated 45 times earnings when the deal was announced.
Disney says Pixarâs value âfar exceedsâ the acquisition price calculated using ânet present valueâ across its businesses. Absent more specifics, the statement requires a certain amount of wishing upon a star. Begin in the theaters.
According to Box Office Mojo, âToy Story 3,â âBraveâ and the other films have generated some $4.5 billion in ticket receipts worldwide. Margins generally clock in at about 10 percent. Generously assume Disney makes 15 percent, and thatâs $675 million of pre-tax profit over the seven years to 2012, excluding the still-developing âMonsters University.â
Consumer products are the second-biggest source of revenue. Some Pixar flicks, like critically-acclaimed âUp,â may not lend themselves well to toys and T-shirts, but others like âCarsâ certainly do. Princesses, pirates and Mickey Mouse and his pals are still big sellers. Pixar films account for 12 percent of Disneyâs lifetime box-office revenue, including oldies like âThe Little Mermaidâ and âAladdin.â Suppose they represent the same percentage of merchandise sales. At a 25 percent margin, that would mean some $580 million of profit before tax.
DVDs are another big contributor. Using estimates by research firm The Numbers and an industry standard 50 percent profit margin, this form of home entertainment has reaped around $575 million. Finally, if income from broadcast and pay television, along with streaming video, amounts to 20 percent of total box office â a figure based loosely on estimates by analysts for other film franchises and studios â that would translate into $900 million.
Tot it all up and the average annual profit from Pixar, excluding âMonsters University,â has been about $390 million. If accurate, thatâs an impressive 60 percent more than the pre-tax income Pixar generated in the year before selling itself. Subtract the 33 percent that goes to Uncle Sam, however, and put the after-tax figure on the 20 multiple of earnings at which Disney trades, and Pixar would still only be worth around $5.2 billion, or about two-thirds of what Disney paid.
That doesnât account for any extra allure Pixar characters and rides may bring to Disneyâs theme parks. Itâs hard to gauge the impact, especially considering the related costs that are attached to revamping these properties. Disney last year, for example, wrapped up a $1 billion renovation of its California Adventure park with new Pixar-themed rides.
After taking all that into consideration, though, shareholders seem to be under a spell, believing Disney â and Iger â can work magic through acquisitions. Another $8 billion has been splashed out on Marvel and its superheroes â again at some 40 times earnings â and Lucasfilmâs âStar Warsâ franchise. Disney nevertheless still regularly trades at a stock market valuation higher than those of its competitors. Suspension of disbelief is part of what Disney sells, but investors shouldnât so easily fall for it.