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Disney-Marvel benefits come with time lag, risks

LOS ANGELES (Reuters) - Walt Disney Co's DIS.N $4 billion bet on Marvel Entertainment's MVL.N superheroes is at best going to take some time to pay off and at worst may have increased some risks for the entertainment behemoth.

Marvel graphic novels sit on the shelf of a bookstore in New York, August 31, 2009. REUTERS/Brendan McDermid

Any initial optimism about the transaction has quickly turned to caution as analysts and investors realize that it is not easy to say whether Disney CEO Bob Iger got a good deal or overpaid.

Among the reasons for that are the myriad of deals that Marvel already has in place with movie, merchandising and theme park partners will take time to unwind. This means that Disney won’t see the full benefits of the acquisition for some time.

There is also concern that Disney has only increased its exposure to what is probably a long-term decline in the DVD sales market.

And this on a deal struck at a relatively rich prospective price-to-earnings ratio of 37 times, and at a 29 percent premium to Marvel’s share price before the announcement.

“Did (Disney) management pay a large price? Yes. But I think we won’t know if it’s a good deal until two or three years down the road,” said James Marsh, an analyst with investment bank Piper Jaffray.

In the short run, some analysts warn that Disney’s stock may trend lower, as the studio battles a recession-hit consumer- and ad-spending landscape in addition to the lack of an immediate payoff from its Marvel division.

Marvel now enjoys ties on everything from films to toys with Disney’s rivals, relationships that will take time to unwind.

Paramount Pictures, a division of Viacom Inc VIAb.N, retains the right to distribute the next five Marvel superhero films, which analysts said will give Paramount about an 8 percent fee on box office results, or about $20 million to $50 million per movie.

For five highly anticipated upcoming films, including “Iron Man 2” and “Thor,” that potentially amounts to a total of $100 million to $250 million going to Paramount instead of Disney.

OVER-PRICED?

And Marvel has a deal in place with Universal Studios for domestic theme park rights and with Hasbro Inc HAS.N for toy license rights, arrangements expected to stay in place a few years more -- till 2017 in Hasbro's case.

That had some investors worrying initially that Disney had overpaid.

Piper Jaffray said in a report that most of the synergies from the deal will not likely materialize until 2011 and beyond, and that it expects Disney’s “stock to likely drift slightly lower as near-term earnings estimates tick down.”

In a separate report, Bernstein Research said, “The transaction raises many more questions that need to be answered in the coming months and ... years.”

The research firm noted that though Disney has been at the forefront in warning about declining DVD sales -- which are estimated to have fallen 6 percent industrywide last year -- the deal with Marvel will make the company more reliant on that sector.

Blockbuster films, like the superhero-laden franchises that Marvel specializes in, often rely partly on DVD sales to beef up returns from movie projects.

Hal Vogel, head of trading and consulting firm Vogel Capital, said another major question mark was whether Marvel’s decades-old pantheon of superheroes can sustain their popularity beyond the next few years.

But analysts also said Disney stands to reap benefits even from movies distributed by Paramount, including the “Iron Man 2” film due out in 2010.

In 2007, revenue from a merchandising joint venture with Sony for “Spider-Man 3” increased by $117.2 million.

On future projects, Marvel stands to gain even more merchandise revenue because it will produce movies on its own.

“Iron Man 2” for instance is likely to boost those numbers, said Barton Crockett, an analyst at Lazard Capital Markets.

Vogel said: “As long as the Disney company is intact and one entity, this is going to be theirs forever, so they’re looking at it from a very long-term perspective.”

Reporting by Alex Dobuzinskis: Editing by Edwin Chan and Richard Chang

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