Disney’s (Walt) (DIS) recent $4.2 billion acquisition of Marvel Entertainment brings with it a cast of about 5,000 comic characters. Its management plans to capitalize on the potential profitability of Marvel’s lesser- known assets, thus enhancing their value. Possibilities consist of marketing Marvel-licensed toys and producing large-budget films. There is also now the opportunity for Marvel heroes to join forces with, or battle, Disney and Pixar-licensed characters in the same setting. 

The massive worldwide entertainment infrastructure Disney boasts, including television, theme parks, films, and consumer products, could provide punch to Marvel’s operations. Specifically, Disney believes it can give Marvel a bigger foothold overseas, as less than 50% of Marvel’s licensing revenues are derived from international sources, while Disney’s is substantially more than that amount.

While the movie rights of some names, such as Spider-Man, X-men and the Fantastic Four are already tied up in long-term agreements with other studios, there are many others that may prove lucrative. Disney, famous for the likes of Mickey Mouse, Lion King, and Hannah Montana, should benefit from the ownership of stories aimed at audiences that are largely male and older than it usually targets. Such obscure figures that could become stars include Ant-Man, a hero with the power to shrink to the size of an insect, and Iron Fist, a wealthy entrepreneur turned superhuman martial arts master.  These, and others in the “Avengers” line of characters from the 1960s and 1970s may be developed into motion pictures. Plus, Disney gains access to newer comics like “The Runaways,” which follows a group of estranged teenagers in Los Angeles.       

In addition to building upon existing characters, Disney, along with the former Marvel creative team, will also create new ones. The plan is to initially launch these characters on television. Currently, the Disney XD network broadcasts about 20 hours per week of programming featuring Marvel-licensed product, and it will now aim to increase this coverage. Also, traditional Marvel figures may begin to appear in Disney content, and vice versa. Marvel characters will not be rebranded, but rather cultivated and spotlighted to a greater extent than previously.

Some further businesses where Disney can gain from the Marvel purchase include publishing, video games, and other consumer products. Marvel has a better than 40% share of the comic book market, while Disney operates a significant children’s publishing unit. In this case, Disney might seek to capitalize on Marvel’s strong industry position to enhance the potential of both firms. As for video games, Disney will look to market licensed games under current agreements, as well as self-producing and distributing Marvel-related games. In consumer products, Disney can broaden Marvel’s reach internationally through already in place retail agreements, in effect enhancing its own competitive position within those stores.

Initially, the impact of Marvel on Disney’s earnings will probably be negative. For its fiscal 2010 (ends October 2nd) the effect will likely be a double-digit percentage dilution, largely due to goodwill amortization. Disney will earn royalties from third-party licensing arrangements, as well as receiving a portion of merchandising income from outside film deals. Over time, Disney may be able to bring some of the licensing deals in house or pursue further third-party agreements. As Disney bolsters the value of Marvel’s assets, the acquisition should start to appear more attractive. We believe that Marvel will be accretive to Disney’s bottom line by fiscal 2012 and over the long term.