Roku Lands $22B Buyout Offer From Fox – But Modest Premium Leaves ROKU Investors Wanting More

• After the transaction closes, existing Fox shareholders will own about 73% of the combined company, while Roku shareholders will hold the remaining 27%.
• Fox will fund the transaction with a combination of debt and cash, having recently secured $12 billion of fully committed bridge financing from Morgan Stanley.
• Before the deal was announced, Needham raised its price target to $170 from $140 and maintained a ‘Buy’ rating on the shares, according to The Fly.

Roku Inc. (ROKU) grabbed investor attention on Monday after Fox Corp. (FOXA, FOX) announced an agreement to acquire the streaming platform in a $22 billion cash-and-stock deal, confirming a much-speculated buyout rumor. However, Roku shareholders seemed underwhelmed, with some questioning whether the offer reflects the company’s strategic value. 

At the time of writing, FOXA shares crashed more than 14% in pre-market trading, while ROKU’s shares gained 1.4%.

ROKU To Receive $160 Per Share

Under the agreement, Roku shareholders will receive $160 per share, consisting of $96 in cash and $64 in FOX Class A stock. This represents a roughly 11% premium to the ROKU’s closing price on Friday. After the transaction closes, existing Fox shareholders will own about 73% of the combined company, while Roku shareholders will hold the remaining 27%.

The deal will combine Fox’s sports, news, and entertainment assets, including Tubi, with Roku’s connected TV platform and The Roku Channel, increasing the total potential number of households to more than 100 million globally, according to Fox. The companies said the merger will create the third-largest U.S. television company by viewing share.

Why Fox Wants ROKU?

FOX expects the deal to accelerate its digital strategy and generate roughly $400 million in annual cost synergies. Meanwhile, FOX will fund the transaction with a combination of debt and cash. It obtained $12 billion of fully committed bridge financing from Morgan Stanley.

“This combination will transform the scope of our company into high-growth verticals and yield a step change in our overall growth profile,” said Lachlan K. Murdoch, Fox’s CEO.

Roku generates most of its revenue from advertising and subscription-related services on its platform. Roku also earns a share of subscription fees when users sign up for streaming services such as Netflix and Amazon through its platform.

Needham Raises Roku’s Price Target

Before the deal was announced, Needham raised its price target to $170 from $140 and maintained a ‘Buy’ rating on the shares, according to The Fly. Analyst Laura Martin said Roku could be worth more to a larger company than as a standalone business, as an acquirer could use its platform, data, content, and services across a broader ecosystem.

She argued that Roku’s true value lies not just in its own revenue and earnings, but in the additional value it can generate for the buyer’s overall business.

ROKU Traders Expected A Larger Bid

Retail sentiment for ROKU remained in the ‘extremely bullish’ territory over the past 24 hours, amid ‘extremely high’ message volumes.

However, retail seemed disappointed with the deal value, with one user expecting a “much higher offer.”

Another user said, “Unless this lower than anticipated valuation sparks a bidding war, it may be time to sell and move on.”

ROKU shares have gained around 29% so far this year.

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