The media industry has long been preparing for consolidation and mega deals. And yet Fox Corp.'s acquisition of Roku seems to have taken the market by surprise.
On Monday, Fox said it would acquire Roku for $22 billion, bringing a streaming tech platform – in addition to a second free, ad-supported streaming service – into its portfolio of linear TV networks and Tubi.
While analysts lauded the deal as a strategic pivot for the legacy media company, Fox shareholders received the news differently. Its stock traded down 16% on Monday, hitting a 52-week low. Shares fell another 4% on Tuesday.
"We view this as a strategic fit. Fox marries its strong content with Roku's leading distribution platform and first party data that add scale and can enhance the value proposition with advertisers," Piper Sandler analyst Thomas Champion wrote in a note on Monday.
Champion highlighted Fox's long list of sports rights and Roku's position as the leading streaming platform – offered on both dedicated devices and smart TVs – as "highly complementary."
"The combined company will be the third largest player in the U.S. by share of viewing, spanning broadcast, cable, local and streaming," he said.
Some industry analysts and insiders – who didn't want to comment publicly on market reaction – attributed the sharp stock reaction to the new debt that Fox would be taking on as part of the deal. Still, the company's leverage will be relatively low after the deal's expected close in the first half of next year.
One industry insider noted that Fox is also likely to spend more when the NFL reopens media rights negotiations, which have already begun for CBS owner Paramount Skydance.
Mike Proulx, Forrester's vice president and research director, told CNBC in an email that it was too early to take this as a negative market reaction and noted that big media deals "often get punished in the short term because they introduce uncertainty."
"In this case investors are likely questioning the near-term cost-benefit. But what the market is missing is the long-term strategic importance of this deal. It's a must for Fox," Proulx said. "It's far from just a content play. The long-term value is in owning the platform, the data, and the ad stack. That's what this deal gives Fox and helps the company to future proof."
In a MoffettNathanson note on Monday, the analyst firm called the deal "an unexpected strategic pivot." LightShed Partners called it a "bold move."
"Legacy media has long suffered from the innovator's dilemma, with most players allergic to risk," LightShed analysts said in a note. "Fox has repeatedly talked about using its financial strength to make acquisitions and was routinely criticized for being underlevered, but Roku is a far larger acquisition than any Fox investor expected."
While Fox's peers have been in the thick of the streaming wars – working to hit profitability for fledgling services, fending off competition and exploring deals to bulk up their content portfolios – Fox has largely stayed on the sidelines.
Earlier this year, Paramount, Comcast and Netflix were among the major media players chasing Warner Bros. Discovery's assets in a bid to bulk up and better compete. Paramount emerged the winner, with a pending transaction that's working its way through regulators.
But the battle left many in the industry wondering what comes next for competitors.
Fox executives have been vocal about looking at deal opportunities, but have said they wouldn't jump at every chance – particularly when it comes to adding the same assets it hived off not too long ago.
In 2019, the company offloaded its entertainment assets to Disney in a blockbuster deal that left Fox with live sports and news TV networks.
Fox is perhaps best known for its Fox News Channel, one of the highest-rated networks in the cable TV bundle. But that bundle continues to bleed customers, while live sports like NFL games and the FIFA World Cup drive viewership and advertising revenue for Fox.
And as more viewing — even for marquee live events and global sports — moves to streaming, Fox has remained largely on the sidelines.
The company acquired Tubi in 2020 for less than $1 billion. Since then the free, ad-supported service has been its biggest streaming priority. Tubi touts the largest library of licensed content and has also been building out originals with content creators from social media platforms.
Last year the company launched Fox One, a direct-to-consumer option that offers all of Fox's content, including sports and news.
But even with Fox One and Tubi, Fox hasn't found itself in the same playing field as subscription-based streamers. And with growing competition for a still-burgeoning segment of digital advertising dollars, Fox has lagged its legacy media peers in establishing a streaming foothold.
In addition to marrying itself to the top hardware maker in streaming, Fox's acquisition brings in another free, ad-supported streamer with The Roku Channel.
MoffettNathanson noted that the acquisition puts Fox in the "upper end of streaming viewership," with Tubi and Roku combined. The combined viewership share edges outs Disney's Disney+, Hulu and ESPN, per MoffettNathanson's estimates.
The firm's analysts added that the deal makes sense from a strategic perspective, giving each company "an immediate boost to reposition their future outlooks," — more scale for Fox and more content and ad capabilities for Roku.
MoffettNathanson added that the deal helps Fox "better compete for future premium sports rights."
The combination also gives Fox more leverage, according to LightShed Partners, when it comes to carriage negotiations.
Roku negotiates with media companies to make their apps available on its platform. It also has considerable control over how content and media players are surfaced on its home screen. In addition, other streamers — from Disney+ to HBO Max — share a portion of their ad revenue with Roku when it's viewed on the platform.
That gives Fox a much-needed stake in the streaming ecosystem — right at the platform level.
For Roku, the deal means a partnership with some of the highest-rated sports and news content in the industry, and a likely boost to engagement. It also puts together two advertising platforms at a time when media companies have leaned heavily into the area as a revenue driver.
Roku has recently returned to shareholder favor following a rocky period. It now breaks out revenue specifics that have reinforced its position in the market.
Roku shares hit a 52-week high on Friday after initial reports of a potential sale. Its stock was up about 50% for the year through last week, even prior to the deal reports.
But its trajectory is not ironclad, and some have questioned the timing of the deal given Roku's current positive momentum.
MoffettNathanson called out two specific weak points for Roku — one being industry consolidation, and the second being Walmart's 2024 acquisition of smart TV maker Vizio.
Walmart, the top seller of smart TVs like those powered by Roku, has been slower than some expected to expand its market share via Vizio, but that could change sooner than later and Roku would need similar scale on its side.
