Last month, we covered a report by Yahoo Finance that RBC Analyst Stephen Cahall was speculating that Apple might use its $237 billion pile of cash to buy The Walt Disney Company. Today this story has resurfaced in many media outlets (Barron’s, Variety, /Film, TheStreet, and BusinessInsider, to name a few), after three RBC analysts released an extensive report on the possibility.
“We have seen increased discussions among investors regarding ‘How could AAPL gain scale in media/content and what could it do with potential cash repatriation?’ Media assets could be part of AAPL’s M&A strategy and [CEO] Tim Cook has noted that deal size isn’t a negating factor,” RBC analyst Amit Daryanani wrote in a note Thursday.
“AAPL’s focus on services and its inability (so far) to replicate its music/iTunes strategy into content/media make acquiring DIS logical in our view. This is particularly true if AAPL can access $200B+ offshore cash via repatriation holiday. There are plenty of factors to consider, but such a deal would create a tech/media juggernaut like no other and instantly scale AAPL’s services, content, and media portfolio, which would make the case for a higher valuation.”
Even though Disney stock hit a 52-week high today at $113 and change, and analysts predict Apple paying a 40% premium, the analysts conclude that while “odds are low,” the possibility of a takeover is “greater than 0%”. However, for Apple to be able to spend that $237 billion in cash, it will have to repatriate much of it from overseas. Under current tax laws, this would be prohibitively expensive (hence the cash is still overseas). However, if the US government provides a “tax holiday” for US corporations to repatriate cash to the US at a far smaller tax rate, Apple could end up with $220 billion in cash in the US to make an acquisition.
The analysts go on with the strategic rationale for the merger:
“The best justification for such a mega deal, in our view, is the ability to do things together that neither company, nor any other company, could do. The sheer scale of a combined company offers some unique opportunities, and we’ve tried to identify some of the more compelling ones below.
“More importantly, Apple and Disney are each not just industry leaders in their own right but titans of industry on a global scale with truly unique products and services. Few people on earth are not already familiar with both companies’ products, yet they don’t compete in any meaningful sphere at the moment. The question therefore becomes what can they do together that they can’t do apart? The answer is they can do just about anything given the technology and financial resources.”
So, while the “odds are low” at the present time, I fully expect this story to gain a lot of traction if there is a corporate tax holiday for US companies to repatriate overseas cash. Right now, investors want Apple to spend its cash, but it’s not a wise move at the current tax rate. If the tax rate ceases being a roadblock, investors are going to clamor for Apple to do something with its cash that will bring a greater return to the company. So even if it doesn’t buy Disney, expect Apple to make some major moves if it can access the overseas cash cheaply.