Fox agrees to buy Roku. Here’s what investors are missing

The media industry has long been preparing for mergers and mega deals. And yet Fox Company acquisition Rocco It seems to have surprised the market.

Fox said Monday it will acquire Roku for $22 billion, adding the streaming technology platform — as well as a second free, ad-supported streaming service — to its portfolio of linear TV networks and Tubi.

While analysts hailed the deal as a strategic pivot for the legacy media company, Fox shareholders received the news differently. Its stock fell 16% on Monday, hitting a 52-week low. Shares fell another 4% on Tuesday.

“We view this as a strategic fit. Fox combines its strong content with Roku’s leading distribution platform and first-party data that adds scale and could strengthen the value proposition with advertisers,” Thomas Champion, an analyst at Piper Sandler, wrote in a note on Monday.

Champion highlighted Fox’s long list of sports rights and Roku’s position as a leading streaming platform — offered on both dedicated devices and smart TVs — as “very complementary.”

“The combined company will be the third-largest player in the United States in terms of viewership share, extended broadcast, cable, local broadcast and streaming,” he said.

Some industry analysts and insiders – who did not want to comment publicly on the market’s reaction – attributed the stock’s sharp reaction to the new debt Fox will take on as part of the deal. However, the company’s leverage will be relatively low after the deal closes, which is expected in the first half of next year.

One industry insider noted that Fox is also likely to spend more when the NFL reopens media rights negotiations, which have already begun for owner CBS. Paramount Skydance.

Mike Proulx, Forrester’s vice president and director of research, told CNBC in an email that it was too early to view this as a negative market reaction, noting that large media deals “are often penalized in the short term because they create uncertainty.”

“In this case, investors are likely to question the near-term cost and return,” Proulx said. “But what the market is missing is the long-term strategic importance of this deal. It is a must-see for Fox.” “It’s not just running content. The long-term value is in owning the platform, the data, and the ad stack. That’s what this deal gives Fox and helps the company future-proof itself.”

In a MoffettNathanson note on Monday, the analyst firm called the deal an “unexpected strategic pivot.” LightShed Partners called it a “bold move.”

“Legacy media has long suffered from an innovator’s dilemma, with most players being sensitive to risk,” LightShed analysts said in a note. “Fox has repeatedly talked about using its financial muscle to make acquisitions and has routinely been criticized for being underleveraged, but Roku is a much larger acquisition than any Fox investor expected.”

While Fox’s peers have been in the midst of the streaming wars — working to make fledgling services profitable, fend off competition and scouting for deals to bulk up their content portfolios — Fox has largely remained on the sidelines.

Earlier this year, Paramount, Comcast and Netflix They were among the major media players chasing Warner Bros. Discovery Assets in an attempt to aggregate and compete better. Paramount has emerged the winner, with a pending deal working its way through regulatory bodies.

But the battle has left many in the industry wondering what comes next for competitors.

Fox executives have been frank about looking at deal opportunities, but said they won’t seize every opportunity — especially when it comes to adding the same assets that were shed not long ago.

In 2019, the company offloaded its entertainment assets to Disney in a blockbuster deal that left Fox with live sports and cable news networks.

Fox is perhaps best known for the Fox News Channel, one of the highest-rated networks in the cable TV package. But that package continues to eat away at customers, while live sports like NFL games and the FIFA World Cup increase viewership and ad revenue for Fox.

As more viewership — even for big live events and global sports — has moved to streaming, Fox has largely remained on the sidelines.

The company acquired Tubi in 2020 for less than $1 billion. Since then, the free, ad-supported service has become streaming’s top priority. Tubi promotes the largest library of licensed content and is also building originals with content creators from social media platforms.

Last year, the company launched Fox One, a direct-to-consumer option that offers all of Fox’s content, including sports and news.

But even with Fox One and Tubi, Fox hasn’t found itself on the same playing field as subscription-based streamers. As competition increases for a still-burgeoning slice of digital advertising dollars, Fox has lagged behind its legacy media peers in establishing a foothold for streaming.

The Roku acquisition changes that.

In addition to pairing with the top streaming hardware maker, the Fox acquisition brings another free, ad-supported streamer with The Roku Channel.

The acquisition puts Fox at the “higher end of streaming viewership,” with Tubi and Roku combined, MoffettNathanson noted. Combined viewership is excelling Disney Disney+, Hulu and ESPN, according to MoffettNathanson estimates.

The company’s analysts added that the deal makes sense from a strategic perspective, giving each company “an immediate boost to reposition its future outlook,” — greater scale for Fox and more content and advertising capabilities for Roku.

Moffett-Nathanson added that the deal helps Fox “better compete for premium sports rights in the future.”

The combination also gives Fox more leverage, according to LightShed Partners, when it comes to transfer negotiations.

Roku is negotiating with media companies to make their apps available on its platform. It also has a lot of control over how content and media players appear on its home screen. Additionally, other streaming companies — from Disney+ to HBO Max — share a portion of their ad revenue with Roku when viewed on the platform.

This gives Fox a much-needed stake in the streaming ecosystem – right at the platform level.

For Roku, the deal means partnering with some of the highest-rated sports and news content in the industry, potentially boosting engagement. It also brings together two advertising platforms at a time when media companies have increasingly turned to the region as a revenue driver.

Roku recently made a comeback in shareholder favor after a tough period. It is now detailing the revenues that have strengthened its position in the market.

Roku shares hit a 52-week high on Friday after initial reports of a potential sell-off. Its stock was up about 50% in the year through last week, even before reports of the deal.

But its path is not set in stone, and some have questioned the timing of the deal given Roku’s current positive momentum.

MoffettNathanson pointed out two specific weaknesses of Roku — one is industry consolidation, the second is Walmart 2024 Acquisition of smart TV maker Vizio.

Walmart, the top seller of smart TVs like those powered by Roku, has been slower than some expected in expanding its market share over Vizio, but that may change sooner rather than later and Roku will need similar scale of its own.