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Disney Approached 21st Century Fox to Buy Entertainment Assets

Twentieth Century Fox studio in Los Angeles.

The talks, first reported by CNBC, ran into an impasse over price and other key terms and have cooled substantially, though they could be restarted, one of the people said.

Traditional media companies are racing to adapt to sweeping industry changes that threaten their business, including the rise of streaming-media services that are siphoning away cable TV subscribers and mergers that have given tremendous clout to a handful of distributors such as Comcast Corp. , Charter Communications and AT&T Inc.

Fox shares rose 10% on news of the talks, while Disney stock was up 2%.

Acquiring some of Fox’s prized assets would help Disney upgrade its struggling television business, which has been hit by ratings troubles and subscriber declines at networks such as Disney Channel and ESPN. A deal would also give Disney more content for streaming services it plans to launch in the next two years and would significantly increase Disney’s exposure to foreign markets in which Fox has a stronger presence.

Fox wasn’t happy with the terms Disney proposed, but is open to the idea of selling the assets, people familiar with the matter said. Fox for years hasn’t been viewed on Wall Street or in the media industry as an acquisition target because it was run by Mr. Murdoch, who it was thought wanted to hand over the business to his sons, James and Lachlan Murdoch. The Murdochs have a 39% voting stake in 21st Century Fox.

Mr. Murdoch had spent the past several years setting up his sons to take the helm. In 2013, he split his media empire into News Corp , owner of The Wall Street Journal and other publishing businesses, and 21st Century Fox, home to the major entertainment assets.

Two years later, the elder Mr. Murdoch stepped aside as chief executive of 21st Century Fox and handed the title to his son James, while Lachlan was named executive co-chairman at Fox. The elder Mr. Murdoch remains executive co-chairman.

A deal like the one contemplated with Disney would throw into question that succession planning.

These days, the elder Mr. Murdoch, who has spent decades building his interests in entertainment, has much of his attention focused on Fox News, which would remain in the fold of 21st Century Fox under the deal considered with Disney, the people say. Fox News has been dealing with the fallout of sexual-harassment scandals and adjusting to a prime-time lineup with new faces after high-profile departures, though it has maintained its No. 1 position in the cable-news ratings. The elder Mr. Murdoch took the reins at Fox News last year after longtime boss Roger Ailes was forced out over sexual-harassment allegations, over which the company has paid out tens of millions of dollars in settlements. Mr. Ailes, who died this year, denied the allegations.

Fox felt that if it sold off entertainment assets to Disney, the slimmed-down news and sports-focused media company that remained could be successful, just as CBS Corp. has been a top performer despite not being among the largest media conglomerates, one person familiar with the situation said.

In 2014, the Murdochs attempted to purchase Time Warner Inc., the owner of CNN, HBO and Warner Bros. But Fox abandoned its pursuit after Time Warner rebuffed its advances and Fox’s stock price declined. AT&T Inc. is now in the process of acquiring Time Warner, pending regulatory approval. Since the failed pursuit of Time Warner, Fox shares had fallen 17% before Monday’s news as the broader market climbed.

Under the deal that was discussed, Disney would have acquired Fox’s 39% stake in U.K. pay-TV company Sky. Fox has bid $15.5 billion to buy the rest of Sky to help expand its global media empire, but the deal has been held up by the U.K. government as it continues to review whether the acquisition would put too much power in the hands of one media company.

The talks with Disney could “put a question mark” over Fox’s Sky acquisition proposal, according to Credit Suisse analyst Omar Sheikh. One of the people familiar with the situation said in light of the stalled talks, the company will continue to pursue the Sky transaction.

Disney’s TV unit, driven by ESPN and to a lesser extent by the Disney Channel and ABC broadcast network, reported an 11% drop in profit in the nine months ended July 1. The company has been hit hard by cord-cutting and viewership is down at its family-targeted channels.

Disney also has less TV business in developing markets than competitors like Fox, making it more vulnerable to U.S. trends like declining subscriptions to traditional cable and satellite TV packages.

Disney Chief Executive Robert Iger in July announced plans to launch a pair of subscription streaming services to help battle rivals like Netflix Inc., from which it is pulling its new movies at the end of next year.

While the purchase of Fox assets under discussion wouldn’t have affected a planned ESPN streaming offering in 2018, it could have bolstered a family-entertainment offering planned for 2019. A deal would also give Disney majority control of the streaming service Hulu, which could be positioned as an adult-targeted streaming service. Disney and Fox each currently owns 30% of Hulu. Comcast Corp.’s NBCUniversal and Time Warner Inc. own the rest.

“We see the real strategy here as Fox content helping Disney build out its direct-to-consumer strategy,” said RBC Capital Markets analyst Steven Cahill.

The assets Disney was looking to acquire from Fox include 20th Century Fox Television, which produces content for the Fox network and rival networks, including the NBC hit “This Is Us,” ABC’s “Modern Family” and CBS’s “Life in Pieces.”

Fox’s cable channels such as FX, known for edgy fare with adult language and content, contrast with Disney’s sweet spot of family-oriented fare.

The international business could be a key attraction for Disney. Fox says its international holdings help it reach more than one billion subscribers in roughly 50 languages in more than 170 countries, spanning Europe, Asia, the Middle East and Latin America.

Write to Ben Fritz at ben.fritz@wsj.com, Joe Flint at joe.flint@wsj.com and Keach Hagey at keach.hagey@wsj.com


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