The Case for an Apple-Disney Merger, More Hope Than Reality

Wall Street loves to speculate about so-called dream mergers. This is where you marry two companies together into a powerhouse that becomes almost unstoppable in one industry or across multiple industries. A new report from RBC Capital Markets now suggests that Apple Inc. (NASDAQ: AAPL) could acquire Walt Disney Co. (NYSE: DIS).

According to RBC’s report, an Apple acquisition of Disney would merge strong brands together into a media and technology powerhouse that might strike fear in the hearts of Silicon Valley and Hollywood alike. They would also benefit from proposed tax changes coming under President Trump and repatriation of their overseas cash.

Perhaps the very first thing that needs to be considered is that an Apple-Disney merger has been pondered about  years ago. After all, Steve Jobs reined over Pixar and Apple simultaneously — and he became the largest individual holder of Disney shares when Disney acquired Pixar in a stock-deal valued at close to $7.4 billion back in 2006.

Another issue to consider here is that such a merger could create the first $1 trillion company by market cap. Apple’s market cap is $743 billion now, and it has over $200 billion in cash — most of it locked up overseas that would have to pay a 35% penalty if repatriated under the current tax laws. Disney’s market cap is about $180 billion, so the two companies combined could get to an immediate $923 billion in market cap, before considering whether a deal is made in cash or stock and before considering price changes of the two companies.

A merger of this sort was even projected to be accretive to earnings in the RBC report, by roughly 15% to 20% at a 40% premium deal, even though it is hard to assign an absolute probability. The report presumes a 40% premium price, or about $157 per Disney share. That would put Disney at about $237 billion in market value, which gets an Apple-Disney to right at $1 trillion. RBC’s report said:

We like Disney on its fundamentals, but a mega-cap M&A narrative is additive to the rerating story. An Apple-Disney combo would create a $1 trillion company with almost limitless opportunities in content and technology… Content is a major focus for Apple, target size is not an issue, and Disney offers an avenue to diversify away from hardware without diluting the strong Apple brand.

RBC’s Steve Cahall, who covers Disney for RBC, said on CNBC that the likelihood is low — above zero — but his discussions with institutional investors indicate that a deal of this kind is getting more attention.

Creating a dream merger is easier to put on paper than it would be to accomplish. Still, there are actually very few overlaps that would create a blockage effort by regulators. Disney has no serious efforts in electronics, tablets, computers and smartphones. Apple is not a serious feature film maker, sells no toys (outside of its smartwatch anyway), has no theme parks and doesn’t have major networks like ESPN and ABC. Theoretically there would be no reason for regulators to block this merger.

RBC further said:

There are plenty of factors to consider, but such a deal would create a tech and media juggernaut like no other and instantly scale Apple’s services, content and media portfolio, which would make the case for  a higher valuation.

While the report goes on and on about the benefits of a merger, tie-ups of this sort have a very mixed reception and outcome. Perhaps a walk through history would have suggested that Jobs might have been more interested in acquiring Disney than Tim Cook would be. Despite the report signaling that investors more recently have warmed to a deal of this sort, this seems like a report full of more hope and direction rather than a report based on what is actually coming down the pipe. As for a caveat, we can all admit by now that anything remains possible in this day and age of megacap stocks.

Disney remains one of the 24/7 Wall St. 10 stocks to own for the decade. Disney shares were last seen trading up 0.8% at $113.96, in a 52-week range of $90.32 to $114.10 and with a consensus analyst target price of $118.04.

Apple shares were trading up 0.2% at $142.13 on Thursday. The 52-week trading range is $89.47 to $145.46, and the consensus target price is $147.61.

While investors have this speculative cap on: imagine which companies might get speculated to become the new Dow Jones Industrial Average stock if these two Dow components became one.