Hollywood Feeding Frenzy: How DreamWorks Deal Could Impact Paramount, Lionsgate

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Jeffrey Katzenberg

Analysts debate additional deal-making after Comcast's high valuation for DreamWorks Animation.

Lionsgate and Viacom could be among the major Hollywood studios benefiting from Comcast-owned NBCUniversal’s $3.8 billion takeover of DreamWorks Animation.

The deal announced Thursday stoked speculation that mergers and acquisitions will continue to heat up for the rest of the year. There already has been eight other deals struck this year worth about $8.4 billion, versus about $9.3 billion in 2015.

And Wall Street is placing bets.

Shares of Lionsgate, long considered a takeover target, popped more than 7 percent after the DreamWorks deal was unveiled. Viacom, which is currently selling a minority stake in its Paramount Pictures unit, saw its stock jump nearly 9 percent.

"Comcast's agreement to buy DreamWorks Animation provides an encouraging valuation mark for Viacom and Lionsgate,” wrote FBR analyst Barton Crockett in an investors note.

Lionsgate, which has a Canadian tax domicile, has confirmed on-again, off-again negotiations with Starz. Liberty Media chairman John Malone, who has a big stake in Starz, has eyed a cross-border deal to avoid the U.S. tax net.

And there also has been speculation that a wealthy Chinese investor might want to own some or all of Lionsgate. There already has been similar deals this year, including Dalian Wanda Group's $3.5 billion takeover of film and TV production company Legendary Entertainment.

"Lionsgate is one of the few stand-alone independent studios left in the ecosystem and M&A tends to spark more M&A," says Macquarie Securities analyst Amy Yong. 

Meanwhile, Viacom CEO Phillippe Dauman was already touting the DWA deal as a harbinger of good news for his own company. 

"I think it shows the value," says Dauman,  speaking at the end of the company's earnings call when an analyst asked about the breaking DWA deal news. "Here you have DreamWorks Animation, a studio that puts out two movies a year."

FBR analyst Crockett in his report compared Paramount favorably to DWA. "We, in our sum of the parts [valuation of Viacom], carry the Paramount studio at a value of just over $4 billion. But this studio has a $31 billion domestic box-office film library that is over six times the size of DWA's library and nearly four times the size of Lionsgate’s library.”

Crockett added that DWA releases two to three movies a year, while Lionsgate releases more than 15 a year and Paramount over 10. He concluded: “This all suggests that the DWA deal provides support for Lionsgate’s valuation and argues for a very positive bias to the valuation that will be placed on Paramount in the sale of a minority stake expected to wrap up in June.”

Drexel Hamilton analyst Tony Wible also wrote in a report that the DWA deal will help Viacom sell its Paramount stake at a higher valuation.

He explained: “This may allow Viacom to secure a larger premium valuation — especially as both studios are undergoing difficult transitions.”

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