You Could Make 10 Times Your Money If the Fox-Disney Deal Dies

If one thing's clear from this year's ridiculous market whipsaws, changing North Korean narrative, and plunging crypto prices, it's that a lot can happen in just the first five months of a new year.

Nowhere is that more apparent than in The Walt Disney Co.'s (NYSE: DIS) potential $52 billion acquisition of most of Twenty-First Century Fox Inc.'s (Nasdaq: FOX.A) assets, a deal that seemed like a foregone conclusion when I first wrote about it in December.

But then Comcast Corp. (Nasdaq: CMCSA) jumped in with a counteroffer that Fox rejected in lieu of a deal with Disney. That didn't hurt Comcast's confidence, however, and the firm is now expected in June to propose a $60 billion counter-counteroffer.

On top of all this is the already full-fledged bidding war for British media giant Sky Plc. (LON: SKY), which has received offers from Disney, Fox (which already owns roughly one-third of the company), and Comcast. The British Panel on Takeovers and Mergers has ruled that if the Disney-Fox deal goes through, Disney must buy the 66% of Sky that Fox does not already own within 28 days.

All of these plot threads are quickly becoming more complicated than the Marvel Cinematic Universe on steroids.

Now, I typically don't give much attention to these deals, since I'm all about unreasonably good bargains - and these mega-deals often leave us with overpriced assets that aren't even worth a passing glance.

But the messiness of this Disney versus Comcast battle, as well as its ensuing governmental "oversight," opens up a unique profit opportunity I'm finding irresistible this time around...

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"The Mouse" Already Wields Way Too Much Power

As if the inter-company drama wasn't interesting enough, the U.S. Department of Justice's antitrust concerns ensure the deal has a long way to go before a stamp of approval.

Keep in mind, this is the same DOJ that has worked diligently to kill the AT&T-Time Warner merger, a deal that would become the largest in media history.

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But another acquisition in the form of Fox's media assets would make the Mouse immensely more powerful than it already is.

Browse the box office numbers on any given weekend, and you'll almost always see a Disney-owned property dominating the leaderboard. The media giant already owns the insanely popular Marvel, Star Wars, and Pixar properties, so a Disney-Fox combo would leave only five major film studios in the United States instead of the six we have now.

That means the new company would control a whopping 40% of the U.S. movie market. This would, without a doubt, turn Disney into a monopoly of Rockefeller-like proportions.

Meanwhile, the august body of brilliant businessmen and great American leaders known as Congress expressed the same concerns that fanboys and movie nerds have been wailing on about in the darkest corners of the Internet since the deal broke...

...namely, that Disney's much bigger influence will affect the quality of and access to America's most beloved media properties.

David Cicilline, chair of the House Antitrust Committee, explained, "Disney's proposed purchase of 21st Century Fox threatens to put control of TV, movie, and news content into the hands of a single media giant. If it's approved, this merger could allow Disney to limit what consumers can watch and increase their cable bills. Disney will gain more than 300 channels, 22 regional sports networks, control over Hulu, and a significant portion of Roku."

As you might imagine, I was never interested in the new company or how Disney Channel's awful tween sitcoms would be affected by the reorganization. Bob Iger can flush the latter down the toilet for all I care.

My main interest has always been in the deal's financial implications, and from the looks of it, I don't think I'd ever consider buying whatever the new company is after the acquisition.

Imagine how the bidding war between Disney and Comcast would escalate the new entity to stupidly overpriced levels instead of just the mildly overpriced levels that shares of Fox and Disney currently fetch in the marketplace.

I also have a long-standing policy of not buying what brilliant people are selling. I consider Rupert Murdoch to be a pretty smart guy with a long record of success in buying and selling media assets.

But similar to how Warren Buffett recommends buying index exchange-traded funds when he himself doesn't touch them with a 10-foot pole, Murdoch is likely making the same kind of attempt at misdirection.

Let him misdirect 'till he's blue in the face. Because I see an opportunity for us to make up to 10 times our money on this increasingly messy deal...

The End of the Disney-Fox Saga Could Give Us a "10-Bagger"

The opportunity we're targeting here is courtesy of that fact that, quite frankly, no one wants this deal to happen.

Besides Disney, Fox, and Trump, nobody thinks this is a good idea. Journalists, politicians, and competitors already despise Disney for its power and ability to wield that power to manipulate smaller companies.

I can easily see those beacons of light and fairness in Congress intervening to stop the deal, or the DOJ spiking it altogether.

That's why I'm thinking an options trade is best for this situation.

Now, I've stated on the record that I rarely trade options. I used to do a lot of chicken shorts back in the day, using put spreads to bet against ridiculously overvalued companies.

But over time, I found those trades offered chump change compared to the stacks of money I've made buying strong companies at unreasonably good prices and sitting on my hands while they appreciated.

Trading options is pure speculation, which I never do unless I'm at the track where I can drink a beer or two, maybe eat a hot dog, and enjoy the afternoon. The results would be similar, but I'd have much more fun betting on a horse.

However, here we have a situation much akin to Secretariat in his prime going off at very long odds against very poor competition.

If I look at the chart, I see that Fox was trading around $25 a share before Disney announced its bid. It's not unreasonable to assume that if the deal gets killed, the shares fall back to that level or even lower, as disappointed investors and now-scorched arbitrage traders chicken out of their leveraged positions.

The FOX Oct. 19, 2018, $30 puts (FOX181019P00030000) are offered at $0.60, and if we're patient, we can get a small lot off for $0.50. If we can, and the deal gets spiked, we could easily make 10 times our money when the shares go back to $25.

But the best part is, if we can't, then we'll have no reason to care.

If we buy a few contracts and it doesn't work, we won't be any more upset than we would by a favored horse losing at the race track.

Perhaps even less so, since, at the track, I usually spill a beer when I stomp my foot in disgust, and I don't drink beer at home. My wife would be mightily pissed if I broke one of her nice wine glasses, so odds are I would set down the glass before stomping.

If the deal collapses, we get bragging rights and a nice little return on a small wager. If it does go through, then there's still a very good chance that the new Fox shares are mispriced, and I can buy some and practice what I like to call "inactive investing" for an extended and wildly profitable period.

Either way, we can position ourselves for a nice payday as the Disney-Fox-Comcast drama continues to unfold in episodes like a mega-sized space opera.

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About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

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