"Australia's always been very family-friendly. We've had immense success here," DreamWorks Animation CEO Jeffrey Katzenberg said of the studio's decision to open "Dreamworks Animation: The Exhibition" at Melbourne's Australian Centre for the Moving Image, which opened April 9. The exhibition features more than 400 items from the studio's history.
Paul JeffersThe stock of DreamWorks Animation soared in early Wednesday trading as Wall Street digested late Tuesday news that Comcast has held talks about acquiring the studio for $3 billion-plus.
In pre-market trading, the stock was up more than 20 percent as of 8 a.m. ET. After the market open, it also rose strongly, but the gain was somewhat less pronounced than the pre-market activity had indicated. As of 10:30 a.m. ET, the stock was up 17.7 percent to $31.93. Early in the trading session, the stock hit new 52-week highs, most recently at $32.30.
The stock’s previous 52-week high stood at $29.75, set in early June last year. In late 2013 and early 2014, the stock traded above $35, and in February 2010, it hit a high of $43.46.
Comcast management remained mum on the news of the deal talks. The company opened its first-quarter earnings conference call saying it would not comment on recent deal “rumors or speculation.” Without naming the studio, a representative said the company would not comment on “recent rumors or speculation about any M&A transaction” before introducing Comcast chairman and CEO Brian Roberts.
One analyst later tried to bait Roberts into saying whether he would rather buy more content or distribution assets. “If you have more than one kid, you love them equally,” he replied. “They are both great businesses. Everything is specific to the situation.” He also said on the call that both parts of the business, content and distribution, are performing at “exceptional” levels and argued that “we are better together.”
Management has been downplaying its need for any acquisitions in the past. NBCUniversal CEO Steve Burke said in 2014 that he feels good about the size of the Comcast-owned entertainment portfolio despite industry and Wall Street talk about possible Hollywood deals after 21st Century Fox’s failed bid for Time Warner at the time. “We certainly don’t think we need to bulk up in content,” Burke told analysts back then.
Roberts was asked last year about Comcast’s key focus areas and interest in further M&A opportunities after the cable giant’s failed Time Warner Cable takeover amid regulatory opposition. “Of course we are disappointed, but it was a unique, one-off” opportunity to buy TW Cable, he said. “We have moved on.” He added: “We have a very special company,” adding the company has always been open-minded to deals, but signaled it was for now focusing on its current businesses.
Meanwhile, analysts on Wednesday started discussing the deal talks, the latest held by the studio led by CEO Jeffrey Katzenberg, and the benefits of a potential deal.
“This seems like a classic case of wanting to acquire increasingly valuable content rights, which are becoming more important given the growth of distribution platforms such as Netflix,” said Liberum Capital analyst Ian Whittaker.
“Although Comcast has its own animation arm (Illumination Entertainment) and may not gain much from acquiring DWA’s animation division (which has operated at a much higher per-film production cost with a number of disappointments in recent years), content owners have become increasingly valuable as of late, and we could argue Comcast sees potential value in the library of franchises/characters that could be integrated further into Universal Studios theme parks, the increasing value of the AwesomenessTV division (of which DWA owns slightly more than 50 percent), as well as the real-time rendering software developed by DWA over the years,” wrote B. Riley analyst Eric Wold in a report.
The analyst, who has a “neutral” rating and $22 price target on DreamWorks Animation shares, said the reported price tag “would represent more than a 25 percent premium to the current enterprise value and an equity value of about $35 per share.” He also highlighted that the latest deal talks “follow at least three other reportedly interested parties back in 2014, including SoftBank, Hasbro and 20th Century Fox.”
Concluded Wold: “While we downgraded DWA from ‘buy’ to ‘neutral’ on 1/3/16 at $25.77, as we believed the shares were fairly valued based on the current slate and outlook throughout 2016/2017, were Comcast interested in acquiring DWA, we would assume they see some synergistic value in DWA beyond what a stand-alone studio’s value would likely reflect.”
Macquarie Securities analyst Amy Yong said in a report that Comcast’s interest “supports our bullish view on stand-alone studios, as they are untethered to any platform and can leverage multiple ecosystems emerging within media.”
“The deal would secure Universal with a well established animation studio, a burgeoning TV business, and two gems in the portfolio: AwesomenessTV and Oriental DreamWorks,” she wrote in outlining the benefits for Comcast’s NBCUniversal. “There have been signs of success in animation, including Despicable Me and Minions; DreamWorks [Animation] would secure its position in family entertainment.”
Added Yong: “NBCU has been able to leverage tentpole films into its growing theme parks, including Harry Potter and King Kong, among others. In the hands of Comcast, we expect DreamWorks could significantly expand its IP, including Kung Fu Panda, into additional outlets beyond consumer products.”
She also expects “some” cost synergies. Highlighting a DreamWorks Animation restructuring plan started last year, she said that the studio currently has $300 million-plus in selling, marketing and general and administrative expenses. “We expect one-third of this could be trimmed,” Yong concluded.
In terms of open questions related to a possible deal, she mentioned: “What’s unclear is the impact the deal would have on DreamWorks‘ distribution agreement with Fox.”
Drexel Hamilton analyst Tony Wible in a report highlighted that he currently doesn’t cover the two stocks, but has covered them in the past. “DWA has been looking for a partner for years and a merger with Comcast would be a nice fit — especially as it helps DWA scale studio overhead,” he wrote. “DWA brings promising non-film assets through its ownership of Classic Media, has a strong digital presence with AwesomenessTV, and has great access to China, which will soon be the largest film market.”
But he also cautioned: “The quality of the film IP is mixed. We do not believe DWA would bolster Comcast enough to challenge Disney and believe any boost to parks from DWA IP would actually help Disney parks.”
Stifel Nicolaus analyst Benjamin Mogil, in an earnings preview for the animation studio that came out just before news of the takeover talks, wrote: “We continue to view DreamWorks [Animation] as an increasingly evolving story beyond theatrical films, and we view the company as the best pure-play name in our coverage universe — in terms of direct relative participation to content demand globally.” He continues to rate the stock a “buy” with a $34 price target.
FBR analyst Barton Crockett entitled a similarly timed earnings preview for DWA and Lionsgate: “Fasten Seat Belts, Bumpy Ride.” He argued: “While the major studios within the content conglomerates have had some stand-out positive movie performances so far in 2016 (Disney and Fox in particular), the independent publicly traded studios (DreamWorks Animation, Lionsgate) have not. This creates a downward bias to our near-term estimates and pressure for the next films from these independent studios to perform against a backdrop of rising competition from major studios, generally, and Disney, in particular.”
