Deal would buy Disney some magic

Three months ago, when Bob Iger took charge of Walt Disney he faced a vexing problem: a Magic Kingdom built on animation – and even synonymous with the art form – had been outpaced in recent years by a new generation of rivals.

Animation is vital to Disney not only because of company lore and the box office and home video revenue it generates, but because characters in movies such as Chicken Little also populate its theme parks, consumer products and a slew of other ancillary businesses.

With reports on Thursday that Disney had entered into discussions to acquire Pixar, or take a controlling stake, there was the possibility Mr Iger could solve its animation problems in a single stroke. Since Pixar pioneered computer-generated technology with Toy Story a decade ago, it has emerged as the premier animation studio, producing an unbroken run of box office success.

A Pixar agreement would have the added benefit for Disney of drawing the media giant closer to Steve Jobs, the Pixar chief executive who also heads Apple Computer. This is all the more important at a time when digital technology is compelling companies such as Disney to sell their content on a variety of new devices, such as Apple’s iPod.

“It is critical that media companies gain a greater understanding of technology and the impact it may have on their businesses,” says Kathy Styponias, media analyst at Prudential Securities. “No company understands technology and the consumer better than Apple.”

Disney and Pixar both declined to comment on Thursday. An acquisition or strategic partnership has long been rumoured, and has fuelled a recent rise in Pixar shares, which on Thursday closed up $1.61 or 2.8 per cent at $58.87.

Disney’s deal to serve as Pixar’s distributor is set to expire following the June release of Cars, although the company still retains rights to any sequels that could be generated from Pixar’s existing library. One possible scenario is that Disney could trade those rights back to Pixar in exchange for a new distribution pact.

A deal would cap an eventful start to Mr Iger’s tenure, in which he has conclusively stepped from the long shadow cast by his predecessor, Michael Eisner – with some help from Mr Jobs. In October, Disney made a splash by announcing that its ABC network had struck a deal with Apple to sell its hit TV programmes, such as Desperate Housewives and Lost, through its iTunes store. The agreement represented a milestone in TV’s migration to new digital platforms, such as the iPod, and was quickly copied by other networks.

A month later, Chicken Little, Disney’s first feature made entirely using computer animation, surpassed Wall Street’s expectations at the box office. The film’s performance was considered a crucial factor that could tilt the long-running negotiations with Pixar.

Yet Mr Iger’s greatest achievement may have been to smooth over relations with Mr Jobs, which had soured under Mr Eisner. “A purchase of Pixar would be a bold strategy by Bob Iger given that a middle ground of just doing a distribution deal would be economically more palatable,” says Aryeh Bourkoff, analyst at UBS. “He appears to want to boost Disney’s studio by buying strong creativity and talent.”

One caveat for any deal involving Pixar is whether a small, independent studio will continue to thrive in a much larger corporate entity. Disney will have to take care not only to please Mr Jobs, who owns 50.6 per cent of Pixar’s shares, but also John Lasseter, the creative force behind Pixar’s success, says Ms Styponias.

Richard Greenfield, analyst at Pali Capital, suggests that a sale could be an admission that Pixar is not confident about its future slate of productions, or could be suffering in a more crowded animation market that also features DreamWorks Animation .

Yet Mr Greenfield sees the speculation about the deal as confirmation of the importance of quality content in a cluttered media market. “Disney more than any other media company needs high-profile content,” he wrote in a note to investors.