RBC: 21st Century Fox will keep going up as Disney acquisition talks simmer (DIS, FOXA)

Disney is reportedly in talks to buy 21st Century Fox's TV assets.
RBC analyst Steven Cahall breaks down the potential details of the deal and thinks 21st Century Fox will spin off the assets Disney isn't interested in.
21st Century Fox could grind higher as the details of the deal are worked out and announced, Cahall said.

It's looking like Disney could be the eventual buyer of 21st Century Fox's entertainment and TV business, but many of the details are unknown. No deal has yet been announced, but reports from CNBC citing unnamed sources are predicting an announcement as early as next week.

In a note sent out to clients on Wednesday, RBC analyst Steven Cahall tried to work out how a potential deal could spin.

"Assuming that Fox bonds don't travel, Fox could potentially spin off Fox News/Broadcast/FS1-2 etc. as 'Fox SpinCo' while leaving the rest of the assets and the debt for Disney to acquire," Cahall predicts.

Creating a spin-off company before selling to Disney could be a clean way for Disney and Fox executives to package the deal. Spinning off the assets Disney isn't interested in to form a debt-free company would provide a clean balance sheet for the Murdochs to do with as they please. They could continue to run the business as it's own entity, but would also be able to bring the assets under the News Corp umbrella or seek a separate buyer as the media industry leans toward forming big content conglomerates.

The so-called "Fox SpinCo" would have an estimated $2.8 billion in annual earnings before taxes, interest and amortization. The assets that would remain part of 21st Century Fox before Disney's acquisition, what Cahall calls "RemainCo" could pull in about $4.7 billion a year in earnings. Disney is reportedly interested in the business at an enterprise value of about $60 billion, which implies a 10.5 value to earnings ratio.

Combined, the RemainCo and Fox SpinCo assets would be worth about $37 per share, according to Cahall's estimates, which is about 11.6% higher than the company's current price of $33.15. Cahall said this means there is room for the company's shares to move higher after a deal is announced.

21st Century Fox has risen 32.2% over the last month as various reports about a potential sale have circulated. Shares have added another 0.49% on Wednesday after Cahall's report.

Cahall was sure to hedge his valuations of the company by saying the deal still has to be announced, then approved by regulators.