In 2012, Disney acquired the rights to the Star Wars franchise from George Lucas for $4 billion. Back then some questioned whether Disney was overpaying for an ageing franchise that had been somewhat tarnished by the three prequel films.
At the time of the deal Professor Aswarth Damodaran of the Stern School of Business in New York (renowned valuation expert and Star Wars fan) calculated that Disney was paying a fair price for the franchise. The success of the new film, Star Wars: The Force Awakens, has prompted Damodaran to update his valuation, which can be found on his blog post.
Damodaran estimates that the three new Star Wars films will generate revenues of $2 billion each (possibly a conservative forecast based on box office receipts so far for The Force Awakens) and the three planned spin-offs will generate $1 billion each. However, as with the original films, the bulk of income will come from add-ons such as DVD rentals and downloads, games, toys and merchandise, and TV shows. His calculations for the previous movies show that for every $1 the films made at the box office they generated $4 in revenue from other sources.
Based on some assumptions about operating margins and a weighted average cost of capital of 7.6%, Damodaran calculates the franchise to be worth $10 billion – a very good return on Disney’s initial investment. The valuation does not include all upsides, such as planned Star Wars theme parks. For the geeks out there you can check the detailed workings in the valuation spreadsheet on his blog post.
Academic studies often report that acquisitions fail to deliver their expected benefits and destroy shareholder value. With its purchase of Star Wars (and Marvel before that), Disney seems to have a model that works by leveraging its consummate commercial skills into iconic media franchises. Of course, this all depends on the next two movies also being hits – a galactic assumption in the film industry.
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