There he is, George Lucas, in his trademark beard, standing next to Mickey Mouse, the two of them holding mock light sabers. The handout photo was meant to be a lighthearted take on the $4 billion merger between Lucasfilm and the Walt Disney Company. But Lucas can’t help a smirk building at the corners of his mouth that seems to say quietly, “Really?”
Or maybe it’s simply irony cresting his mug. After all, he made his stand in Marin, famously avoiding the town that gave us the Kardashians, the “Twilight” saga and that nightly call to worship at the church of fame known as “Entertainment Tonight.” And even as Mickey’s gloved hand rested on Lucas’ shoulder and the photographer snapped away, Lucas knew that, by selling off the company he built on the backs of Dr. Henry Walton Jones and C-3PO, he was escaping that sort of nonsense once and for all.
It’s been six months since the marriage of empires was consummated in a carnal act where the only one who felt like a smoke afterward was Wall Street. In the afterglow, Lucas became the second-largest Disney stockholder, which is nice. But when you’re No. 120 on the Forbes 400 with a net worth of $3.8 billion (and that was before the Disney deal), the list of what you want is likely short. What Lucas did get was a guarantee that “Star Wars” will live on—and that was a want on the most primal level.
It isn’t like the earth didn’t move for Pixar-ESPN-Touchstone Pictures-ABC TV. Mouse Inc. got Lucasfilm, LucasArts, Industrial Light & Magic, Skywalker Sound…and Marin County.
It’s the last item on Disney’s list that may cause some head-scratching at the happiest place on earth. But let’s get back to that a little later.
The art of the deal
The acquisition caught most of Hollywood flat-footed, a tribute to Disney CEO Bob Iger’s ability to keep the deal hush-hush in a town that does nothing but dish. The Hollywood Reporter said Iger praised his senior staff for sitting on the possible transaction for months as details were negotiated. It was a given that nothing was going to leak out of the Lucasfilm camp; the filmmaker’s love of secrecy is a well-known obsession among the local press.
Not much is known about how the deal got done, because neither Disney nor Lucas has talked about it. Lucasfilm’s long-time communication chief, Lynn Hale, declined to speak, deferring to Disney. A request for a chat with Iger turned out to be a mere wish upon a star.
A post-deal video, with Lucas, Hale and Lucasfilm co-chairman Kathleen Kennedy, did say the purchase was initiated by Lucas as he contemplated retirement. He said his desire was to find a home for the Lucas companies that was large enough to protect them, with a company that had a desire to do things at the same high level that was part of his company’s culture.
As Lucas did his due diligence, he no doubt became informed of the ginormous scale of the Disney domain. A brief run through the company’s yearly filing with the Securities and Exchange Commission (SEC) is an exercise in appreciating just how far flung and profitable Disney’s holdings are. The company has 74 subsidiaries and companies under the Disney umbrella, including 18 Disney resorts (with locations in Paris, Tokyo and Shanghai, among others) and the Disney Vacation Club, a TV network in Russia and a software media firm in India.
Disney's holdings include ABC TV, an 80 percent equity position in the ESPN companies as well as a 50 percent piece of the A&E networks. It owns eight television stations in the United States, including KGO in the Bay Area, as well as ABC affiliates in Los Angeles, New York, Chicago and Philadelphia. It also has SOAPnet, Disney Music Group and Radio Disney. On the motion picture front, it boasts Touchstone Pictures, Buena Vista Pictures, Marvel Entertainment and Pixar Animation Studios. In 2012, the company posted net income of $6.1 billion, which included the Lucasfilm deal.
So clearly, Disney had the scale and the financial health Lucas desired to keep his namesake in the fashion to which it’s become accustomed. In one of the series of videos released by Lucasfilm following the buyout, mostly on “Star Wars,” Lucas himself remarked that after the initial “Star Wars” film was released, somebody said to him that the picture was “the kind of film Disney does.”
Disney has never balked at laying out big cash when it comes to acquisitions. According to Capital IQ, the company spent $19.7 billion buying up Capital Cities, which included ABC and ESPN. It paid $7.6 billion for Emeryville’s Pixar Studios. Fox Family set Disney back $5.2 billion and Goofy and Co. shelled out $3.9 billion buying Marvel.
Disney has a remarkable record when it comes to acquisitions. In 1993, it bought Miramax Films and picked up Capital Cities in 1996. That same year, it picked up the California Angels baseball team. In 2004, the Mouse bought the Muppets and, two years later, it grabbed up Pixar Animation. Marvel Entertainment was swept up in 2009. And while the Angels were sold off (not every team can be the San Francisco Giants) along with Miramax, the rest of the acquisitions remain in the Disney stable, successful and flowing cash.
Luke Skywalker as the cash cow
With Lucasfilm, Disney picked up two of the all-time most enduring movie franchises, “Indiana Jones” and “Star Wars,” along with the best visual effects shop in the business, Industrial Light & Magic (ILM). LucasArts is still a moneymaker and Skywalker Sound continues to draw work from the likes of Dreamworks Studios, Columbia and Warner Brothers, not to mention Disney properties Pixar, Marvel and Disney.
For all the talk of Lucasfilm’s various pieces, it’s clear the “Star Wars” franchise is the centerpiece of the acquisition. Most of the post-deal chatter emanating from So Cal and Disney has been about the fact that the “Star Wars” movie legacy will not only be safe, but that a new movie is already in process. Part of the deal is that Lucas had “Star Wars” VII, VIII and IX already planned out, and that his vision would guide production. In January, Disney named J.J. Abrams to direct the latest installment. ABC Entertainment President Paul Lee told Entertainment Weekly now that the dust has settled, he wants to chat about producing a live action “Star Wars” television series. It’s an open secret in Hollywood that 50 episodes of script have been sitting on the shelf in Marin for years. The trouble is the projected cost per episode was $5 million, and Lucasfilm wanted to retain ownership of the series. But now that Lucasfilm is in the family, the rights (at least) aren’t an issue.
According to boxofficeprophets.com, since 1977, Lucasfilm has realized $4.5 billion in box office receipts from “Star Wars,” another $3.8 billion in home video and $2.9 billion in video game license cash. Additionally, Lucas saw $1.8 billion from book sales and $1.3 billion from this-and-that. All together, it totals $14.3 billion—and that doesn’t cover the largest piece of the Yoda pie: Toys add another $12 billion to the mix.
The wisdom that flows from the deal is this: While Lucas was good at getting toys to market, Disney is much better. In 2011 alone, Disney sold $37.5 billion in retail licensed products.
Post-deal, a number of investment analysts quietly weighed in on the deal, since Disney’s a public company with a market cap value of about $97 billion. David Miller, an analyst for Caris & Co., told Bloomberg that investors and Wall Street may not see the payoff in the deal for a while, because Disney isn’t looking for a short-term gain in its stock price. “What Wall Street is missing here is the supplier power that Disney now has. [The Lucasfilm deal] makes sense strategically.”
Matthew Harrigan, an analyst with Wurderlich Securities, figures Disney got the better end of the deal based on the idea of the Mouse pulling down $800 million per future “Star Wars” movie and making just $250 million in the non-Star War years for a total of $5.2 billion—or $1.1 billion more than what was paid.
Harrigan made this back of the envelope calculation right after the deal was done. That was before Disney CEO Iger let the feline out of the valise, saying his company had plans to produce stand-alone “Star Wars” movies, populated by characters from the same universe but not part of the original “Star Wars” trilogy. “The films will be released during the six-year period of the new trilogy, which starts in 2015 with ‘Star Wars Episode VII,’” Iger shared with the Associated Press in February.
The non-trilogy films may be criticized by “Star Wars” purists, and Disney may have to take some lumps about whether it’s truly honoring its commitment as keeper of the “Star Wars” legacy. But it’s a fair bet that even the most dedicated “Star Wars” geek ain’t staying home when it comes time to plunk down some cash for tickets and a bucket o’ popcorn. And Disney has been doing this for a bit. While it has nothing but respect for the extraordinary film achievements Lucasfilm had with “Star Wars,” in the end, this is about making the cash register ring loud and long.
With that in mind, it’s worth looking at the structure of the deal and what hasn’t happened thus far. Specifically: Disney bought the Lucasfilm assets, but not the real estate. This may seem obvious, given the San Francisco campus is part of the old Letterman Hospital on the Presidio and is on a lease, but the Marin properties are also not part of the mix. What this means, in simplest terms, is that, while Disney certainly bought the heritage of the films and the catalogs, Disney only purchased the human capital of Lucasfilm. Those assets walk out the door every night, and for the deal to work the way it needs to, it’s up to Disney to hold those assets…or sell them off at a profit.
In many acquisitions, especially those made by private equity firms, the model is one of stripping the assets of a company away, based on the premise that the parts are worth more than the whole. Were that the direction Disney wanted to move, it would be shopping LucasArts, Industrial Light & Magic and Skywalker Sound.
And that could still happen. But Disney is a public company, not a private equity fund, and has previously followed a model of acquire and hold. There’s nothing to suggest it intends to do something different.
In fact, there’s nothing to suggest much of anything. On the day the deal went down, longtime Lucas spokeswoman Lynne Hale told USA Today that Disney’s “intent is for everyone [in Lucas’ companies] to stay where they are.”
Contacted by NorthBay biz to elaborate a bit more a few months after the transaction, Hale politely declined comment, saying anything about the deal or the future needed to come from the mothership in Los Angeles.
And the mothership was mum.
On the homefront
Two sources within Lucas said that Disney hasn’t shared its thinking with anyone, which has made some employees a little uncomfortable. “We kind of think we’re safe for this year, but nobody really knows.”
Another highly placed Lucas official assured that changes aren’t on the menu. “[Disney] bought “Star Wars”; it wants us to be very successful. We have a 40-year track record of knowing our brand. Look at how it’s treated Pixar.”
(Pixar was acquired in 2006, and nobody’s tried to move the animation studio out of Emeryville. Moreover, Pixar has retained control over much of its creative side and its corporate culture, though to get that done was something of a public fight. A request to speak to Pixar’s CEO and Sonoma resident John Lasseter about the relationship between Pixar and Disney wasn’t fruitful, as the company failed to respond.)
Professor Robert Eyler of Sonoma State University knows how that feels. In early January, Dr. Eyler, who’s also interim CEO of the Marin Economic Forum, requested a meeting with Disney CEO Iger via a letter. Eyler offered to travel to Burbank, along with Judy Arnold of the Marin Board of Supervisors, to talk with Iger about how the county could work with Disney to make the most of its acquisition. “Our interest is in developing a long-term and mutually beneficial relationship with you and the Disney Company,” the letter reads. Eyler followed up with a phone call. At this writing in February, Iger still hasn’t gotten back to him.
The one-page letter also says the pair would like to talk to Iger about Disney’s termination of its lease at Hamilton Landing in 2011, a move that put 450 employees on the street when Disney pulled the plug on film production/special effects company ImageMovers Digital.
What wasn’t in the letter was any mention of Grady Ranch, the real estate debacle where Lucas had planned a studio project—and had it approved by the county—before neighbors threatened to hold the project up with an environmental lawsuit and Lucas elected to walk away. Following that embarrassment, the county publicly begged Lucas to reconsider, but the neighbors had finally gotten on his last nerve. He’s now working with the Marin Community Foundation to build affordable housing on the property. (At a Planning Commission meeting in mid-February, Marinwood and Lucas Valley residents opposed the plan to rezone Grady Ranch as a site for affordable housing.)
Eyler may not have written about Grady Ranch, but that doesn’t mean he doesn’t want to talk to Iger about it. “We need to make Disney understand that Marin County is open for business, and that Grady Ranch won’t happen again.”
The sentiment was echoed by Cynthia Murray, CEO of the North Bay Leadership Council. “Grady Ranch was the canary in the coal mine for Marin. That damage needs to be undone. We need to rebrand Marin as being business-friendly.”
Peter Sealey thinks it might be too late for that. Sealey, former president of marketing and distribution for Columbia Pictures, these days heads up the Sausalito Group, a marketing consulting firm. “Disney may feel a little jilted after what happened with Grady Ranch; it was completely mishandled,” he says by phone from his Sausalito office.
Sealey sees Lucasfilm as being different than Pixar. “I think you’re going to see at least some of Lucas move to Burbank, the economics are too compelling. It makes sense that things like the library, licensing, financing, human resources, even post production could end up consolidated with Disney. Some of Lucas will stay put in Marin, but I think a big chunk of it will end up in Burbank.”
Murray disagrees. “The reason Disney came here before was because the talent was up here. There’s still a shortage of talent—and a strong demand for it—so I don’t see them being successful in getting that talent to move to Southern California. But I also don’t think that means they’ll keep the company in the Bay Area.”
Eyler was even more outspoken about Lucasfilm staying put. “The assets are here for Disney. It’s possible Lucasfilm could expand here because Disney could subcontract Lucas out. Lucasfilm could wind up being a profit center.”
In the end, Disney got “Star Wars,” along with some other assets that have real value and are well regarded in their industry niche. But Disney will look at ILM, LucasArts and Skywalker Sound differently than George Lucas did. While Lucasfilm and “Star Wars”/“Indiana Jones” will be a cash register, the other assets would do well to book their own profits. While Disney can certainly drum up more industry wide business for them, as well as using them in-house for Disney-based productions or products, remember how Mickey handled ImageMovers Digital: When that subsidiary stopped flowing black ink, Disney pink-slipped 450 people.
While George Lucas is no longer involved in the day-to-day operations of the companies he founded, it’s worth noting he’s still the second largest noninstitutional stockholder in the company, behind the Steve Jobs Trust. A guy with $2 billion of your stock is a guy who should have your ear.
The trouble is, it’s hard to say just who Disney listens to because Disney isn’t talking. And that’s a shame for the people who work for Lucasfilm.
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