Walt Disney Co on Monday agreed to buy Marvel Entertainment Inc for $4 billion in the year's biggest media deal, banking on Marvel's pantheon of superheroes to broaden its lineup of movie franchises that appeal to boys.
Disney adds Spider Man, Iron Man and Thor to its roster of classic characters like Mickey Mouse and Snow White, and will feature the super-heroes in movies before rolling out associated theme park rides, TV shows and merchandise.
But the deal comes at a tough time in the entertainment business, with advertisers avoiding spending on new campaigns and consumers cutting back on everything from DVDs to travel.
The deal is also expensive. It values Marvel at 37 times its estimated 2009 earnings, and offers shareholders a 29 percent premium to Friday's closing price. Standard & Poor's reacted by placing Disney's credit rating on its negative watchlist, saying it may need to issue new debt even as earnings stagnate or fall in the recession.
But the risk of overpaying did not deter Disney from seeking out a deal to address an area of concern among investors: How can it better reach more young males.
This helps give Disney more important exposure to the young male demographic that they have sort of lost some ground with in recent years, said David Joyce at Miller Tabak & Co.
Disney has long been a blockbuster brand with girls thanks to characters such as Hannah Montana, Cinderella and Snow White, but has struggled to achieve the same kind of success with boys.
Movies including Iron Man 2, the sequel to the smash hit about a billionaire playboy with a high-tech suit of armor due to hit theaters in 2010, or 2011's Spider-Man 4 and Avengers, should help resolve that issue.
Disney will also be able to use its marketing and entertainment clout -- stretching from ABC to cable television to theme parks -- to promote and build characters such as Thor in ways Marvel never could.
The deal to buy the 70-year-old studio -- which began life as an arm of a pulp fiction publisher in 1930 before bankruptcy, then rose to prominence in the past few years following Spider-Man -- is Disney's largest since the $7.6 billion purchase of Pixar in 2006, and it made waves.
Shares in DreamWorks Animation SKG Inc spiked 6.5 percent on speculation it too may become a takeover target.
But analysts raised questions about companies like Viacom Inc, Discovery Communications Inc, and Hasbro Inc that have existing business partnerships with Marvel. Hasbro stands to lose its chance to acquire valuable content for a new TV venture with Discovery, given that Disney is likely to hoard Marvel content for itself.
Disney agreed to pay a total of $30 per share in cash plus about 0.745 Disney shares for each Marvel share owned. The deal was approved by the boards of both companies.
The deal is expected to gain approval from antitrust regulators, said Evan Stewart, an antitrust expert with law firm Zuckerman Spaeder LLP.
The shares of Marvel, which was founded in 1939 and rolled out its first blockbuster character, Captain America, in 1941, shot up to a high of $49.29 before falling a bit to close at $48.37 on the New York Stock Exchange.
Disney approached Marvel a few months ago to get to know them, Disney Chief Financial Officer Tom Staggs told Reuters. The overture began with a meeting between Disney Chief Executive Robert Iger and Marvel CEO Ike Perlmutter and evolved into merger discussions over a series of meetings.
We at Disney had admired them because of their position and asset base, Staggs said. With conversations over time we came to believe in the value of a combination.
Shares of Disney, which will acquire ownership of more than 5,000 Marvel characters, fell 3 percent to $26.04. The deal is expected to close by year-end, but will not add to Disney earnings until fiscal 2012.
Though Disney stands to get a slice of some of Marvel's hottest, upcoming slate of movies -- including Thor and Iron Man 2, it would not gain in the short term from lucrative theatrical distribution fees.
Paramount Pictures said in a statement its five-picture distribution deal with Marvel remains in force. And Sony Pictures, the division of Sony Co behind the Spider-Man movies, can continue to make movies in the franchise, under an existing agreement.
The acquisition came as a surprise, even though Iger had mentioned recently the company would consider acquisitions that bolstered Disney brands across international markets and on new technology platforms.
While it could kick-start more mid- to small-sized deals in the media sector -- where stocks have outperformed the broader Standard & Poor's 500 this year -- few analysts see another bidder making a play for Marvel.
A major reason is the presence of Marvel's Perlmutter, who owns 37 percent of the company and will oversee it within the Disney empire. Perlmutter will trade his stake in Marvel for a 1 percent stake in Disney, but will not receive a seat on its board of directors -- as did Pixar CEO Steve Jobs.
Disney was advised on the deal by Goldman Sachs, Allen & Company and Guggenheim Partners, while Marvel worked with Bank of America Merrill Lynch.
Disney executives drew a number of parallels between the Pixar and Marvel deals, and suggested it would keep the Marvel brand intact.
The goal here is not to rebrand Marvel, Iger said on a conference call.
Caris & Co analyst David Miller said Disney was sandbagging a little by estimating the deal would not add to its earnings for another two years.
They said the same thing with the Pixar deal, said Miller, who has above average ratings on both Disney and Marvel. They will make it accretive a lot sooner. They are underpromising, as they always do.
And what do the fanboys -- the ones who scrutinize every comic-book adaptation for faithfulness to the original -- say?.
Stan Lee -- the co-creator of Spider-Man and Chairman Emeritus of Marvel -- says don't worry.
To me, becoming 'Disneyfied' is not a bad thing. I mean look at (Disney) movies like 'Pirates of the Caribbean,' Lee, who parted ways with Marvel years ago said in a telephone interview with Reuters. Disney knows how to do movies.
(Additional reporting by Alex Dobuzinskis in Los Angeles, Franklin Paul in New York and John Tilak in Bangalore; editing by Edwin Chan, Derek Caney, Andre Grenon and Bernard Orr)