CNBC reported Monday that 21st Century Fox has been holding talks to sell most of the company to Disney, leaving behind a media company tightly focused on news and sports, according to people familiar with the situation.
The two sides are not currently talking at this moment, but given the on-again, off-again nature of the talks, they could be revisited, the sources said.
Shares of 21st Century Fox rose 10 percent Monday following the CNBC report, while Disney shares traded up 2 percent. The gains continued on Tuesday with 21st Century Fox up 3.5 percent mid-morning and Disney shares up another 2 percent.
"By combining the library assets and production spend of Disney and Fox, [the] pro forma firm apt to more effectively compete with emerging OTT platforms like Netflix and Amazon," Citi Research analyst Jason Bazinet wrote in a note to clients Monday entitled "Disney + Fox Makes Sense."
The "pro forma firm would allow Disney to rapidly achieve direct-to-consumer scale … Transaction [is] likely to help Disney's multiple as it accelerates direct-to-consumer roll-out."
The analyst reiterated his buy ratings for both Disney and 21st Century Fox shares and his price targets of $119 and $36 respectively.
Bazinet noted how the media industry needs scale to compete Netflix's more than $10 billion a year in content spending.
In similar fashion, Credit Suisse is bullish on the potential asset deal between the companies.
"Our initial view is that it would be hard to argue against the rationale for this deal … creating a combined company with greater scale to invest in original content," analyst Omar Sheikh wrote Monday. "If confirmed, this transaction would obviously be welcomed by both sets of shareholders, and would also drive a re-rating of the whole sector, in our view."
Sheikh also reaffirmed his outperform ratings for Disney and 21st Century Fox shares.
One Wall Street said any potential asset sale will not come cheap.
"Based on our SOTP [sum of the parts] analysis in a deal, we believe FOX is worth about $39/share, 40% above current levels. Our analysis assumes Disney would have to pay FOX close to $37B for the assets," Jefferies analyst John Janedis wrote Tuesday.
21st Century Fox stock closed at $27.45 Monday.