Fox stock: why investors seem to dislike the $22B Roku deal

Fox Corporation FOXA is being punished this morning after its management disclosed plans to spend a whopping US$22 billion (approx. $38.5 billion) on buying Roku Inc (ROKU).

While the company’s leadership pitched the deal as a “defining moment” to merge live sports and news with a massive digital footprint, Fox investors are pushing back heavily.

Here’s why FOXA shares are being sold off following the ROKU announcement on Jun. 15.

Fox stock sinks on dilution concerns

Under the terms of the deal, Roku shareholders will receive $160 a share, structured as $96 in cash and 0.9693 Fox shares (Class A) for each ROKU share.

This means Roku shareholders will end up owning roughly 27% of the combined company.

Institutional investors generally dislike mega-mergers that rely heavily on issuing new stock, as it severely dilutes the ownership percentage and per-share earnings for existing shareholders.

Massive new debt load

To fund the cash portion of the transaction, FOXA is taking on substantial leverage. The company secured a US$12 billion (approx. $21 billion) fully committed bridge financing facility from Morgan Stanley.

Investors are being sensitive to this massive new debt load, especially given that the legacy media firm is already grappling with structural declines in its traditional cable TV business.

They’re concerned that servicing this debt will eat into free cash flow and restrict future buybacks or dividend increases.

Compromising Roku’s strategic ‘neutrality’

Roku’s historical success lies in its position as an agnostic, open platform that treats all streaming apps (Netflix, Disney+, Prime Video, etc.) equally.

Now that ROKU will be under Fox’s ownership, investors fear that this platform's neutrality will be compromised.

If rival streaming networks believe FOXA will favour its own content (like Fox Sports, Fox News, or its free ad-supported streaming service, Tubi), they may alter their relationships with Roku.

This could threaten the company’s core advertising and subscription revenue split model, which would hurt Fox stock in the long run.

Overpaying for crowded streaming growth

Fox pivoted away from expensive scripted streaming wars in 2019 by selling its entertainment assets to Disney to focus strictly on live news and sports.

Buying Roku for US$22 billion (approx. $38.5 billion) – to some investors – feels like a massive, expensive U-turn back into a highly competitive, crowded digital ecosystem.

FOXA stock is also crashing because ROKU has gained some 20% on the buyout news, making the final price tag a steep pill for its shareholders to swallow.

In short, Fox investors feel the company is taking on too much debt and diluting too much equity to buy a platform whose core asset might be undermined by the acquisition itself.

How Wall Street recommends playing FOXA shares

Heading into Monday, Wall Street had a consensus “Moderate Buy” rating and a $70 mean price target on Fox shares.

However, if analysts share the aforementioned investor concerns, it’s reasonable to assume that they might downwardly revise estimates for FOXA in the days ahead.