Analysts: What SoftBank's Takeover Would Mean for DreamWorks Animation

Jeffrey Katzenberg
Paul Jeffers

"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.

The $3.4 billion price tag would only be a small fraction of the approximately $30 billion spent by the Japanese conglomerate on acquisitions last year

Japanese conglomerate SoftBank's possible takeover of DreamWorks Animation would give the company ownership of content, which it has been craving to further feed its telecom businesses in Japan and the U.S.‎ The $3.4 billion bid was first revealed on Saturday by The Hollywood Reporter

‎Last year, the company made an unsolicited $8.5 billion bid for Vivendi's Universal Music Group. While that was a premium of at least $2 billion compared to what analysts’ estimated the music giant was worth, Vivendi rejected the offer.‎

‎Analysts at the time had different takes on over whether SoftBank could benefit from major synergies in that deal. While the growth of mobile music consumption encouraged some, others expressed concern that music competitors may not license their content to SoftBank.‎

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As for the DreamWorks Animation bid, its $3.4 billion price tag would only be a small fraction of the approximately $30 billion spent by SoftBank on acquisitions last year, including the $21.6 billion purchase of U.S. telecom giant Sprint. It compares with the $1.9 billion market value that DWA had on Friday. ‎

"It would be a good time to buy as [DWA's] valuation is fairly low at the moment," said Gerhard Fasol, CEO of boutique consultancy Eurotechnology-Japan, and a close observer of SoftBank, in highlighting the opportunistic timing of the bid.‎

"It makes sense in terms of SoftBank wanting to acquire more content, and they have already got game companies Supercell and Gung Ho," added Fasol. "They should be able to improve mobile distribution for DreamWorks, as well as through Yahoo Japan, and maybe even Alibaba. There's synergy there."‎

SoftBank is the largest shareholder in Alibaba, owning a stake of more than 30 percent in the Chinese e-commerce company that had a record IPO last week. Softbank began with a $20 million investment back in 2000. Its stake is now worth more than $50 billion. SoftBank CEO Masayoshi Son has said he has no intention of selling the stake, saying he thinks it's only the beginning for Alibaba. ‎

Industry observers said the SoftBank and Alibaba relationship would further help DWA with its push into China and broader Asia.‎ ‎‎

"DWA is one of a few smaller companies with a substantial portfolio of IP that is well connected in the global media landscape‎," Janney Montgomery Scott analyst Tony Wible said earlier this year in a report. "We believe Chinese firms could look to DWA as a means to export media and build up their local film industry ... Furthermore, there is a penchant for animated content in the region (10 percent of China’s box office)."

Beyond games featuring DWA characters, SoftBank could also offer DWA video content to its mobile subscribers, according to one investment banker not involved in the deal talks.‎

For DWA, the deal would provide further financial firepower at a time when it has been trying to diversify its business amid disappointing box-office results.‎

"A sale has made sense for awhile given the company's struggles producing hits and growth," stated Steve Birenberg of Northlake Capital Management. "I suppose it is interesting in that it is not a traditional buyer. I've thought DWA and [Lionsgate] might be sold for some time and the possibility of a foreign or digital company being the buyer was intriguing. SoftBank is both. Would a company Ike Google or Yahoo or Alibaba be interested in a studio as well? I guess this is endorsement of the value of content even in a world where content distribution/viewing is fragmenting."

Cowen analyst Doug Creutz, who has a "market perform" rating and $21 price target on DWA's stock, recently summarized his take on the state of the studio like this: "Concerns about the company's recent film performance and overall trends in box office, coupled with question marks about the future payoff for current investments, leave us unenthusiastic about DWA shares."‎

He added: "DWA is a difficult company to value at present due to the enormous degree of earnings leverage there is around feature film performance. Two of the company's last three films have performed poorly at the box office; if this is representative of future performance, then shares appear significantly overvalued at current levels. However, if film performance reverts back to levels more typical of 2008-2011, then shares appear attractively valued given the company's recent progress in lowering per film production costs and developing a television production revenue stream." ‎

One industry observer on Sunday said DWA management, led by CEO Jeffrey Katzenberg, would want a clear price premium in any takeover. A price tag of $3.4 billion would be a significant premium. ‎Two Wall Street sources said Sunday that they had seen Chinese online or tech giants as possible suitors for DWA. ‎

Softbank and its CEO Masayoshi Son, 57, have a reputation for being business mavericks in Japan with a style more mindful of U.S. than Japanese executives. ‎In 2010, Son famously outlined a 300-year plan that included the goal of investing in 5,000 companies by 2040, the year that marked only the end of the first 30 years of the period covered by the plan. ‎

In another sign of Son's ambition, Sprint was the largest overseas takeover in Japanese corporate history.‎‎ According to past reports, Son and his team introduced constant sales updates to improve the performance of the Sprint sales team. ‎

‎In stark contrast to the risk-averse nature of much of corporate Japan, Son, who Forbes magazine this year called Japan's richest man with an estimated net worth of $22.3 billion, is famed for a willingness to take the big gamble and barely flinch when it goes wrong. SoftBank invested heavily in new ventures during the late 1990s dotcom bubble, and when that burst, the company's share price plunged by more than 95 percent. That is reported to have reduced Son's personal net worth by around $75 billion, by some estimates the largest ever drop in wealth for a single person. ‎

Son's nerve was unshaken and SoftBank currently holds stakes in 1,300 companies, almost all of them linked in some way to the Internet. ‎

"Son has the Midas touch; well, not everything he touches turns to gold, but a lot of it does," said Fasol. "It's a very sophisticated venture capital approach, whereby some fail and some turn out spectacularly well, like Alibaba." ‎

If there is one story that encapsulates Son, nicknamed Masa, it would be the time he sat down with Steve Jobs in 2005 and convinced the Apple founder to grant him exclusive rights to sell the iPhone in Japan. What makes the episode truly remarkable is that there was no iPhone in existence — Apple wouldn't officially announce it until 2007 — no imported cell-phone had ever succeeded in Japan, and Son had no mobile carrier through which to sell it. ‎

Much to Jobs' amusement, Son said that he showed him a hand-drawn sketch of what he thought an iPhone should like: only to be informed that Apple already had a design. Son left the meeting with a verbal promise that he would get the Japanese rights to the iPhone provided he had a mobile carrier by the time it was released. ‎

The $15.6 billion takeover of Vodafone Japan's struggling operations in 2006 — a move criticized as excessively risky by many analysts at the time — gave Son a carrier, and SoftBank's exclusivity on the iPhone between 2008 and 2011 helped make it the fastest growing network in Japan after years of underperformance as Vodafone. ‎

The grandchild of Korean immigrants, Son attended high school and university in the U.S., giving him a global perspective rare in Japanese executives. He founded SoftBank in 1981 as a software distribution business, getting a major break in 1996 when he established Yahoo Japan as a joint venture with Yahoo. Under Son's shrewd management, Japan is one of the major global markets where Yahoo leads Google as the primary search engine; SoftBank's investment in Yahoo's U.S. parent company is also reported to have netted a profit of around $2.5 billion. ‎

"Son is a genius. I don't think there is anyone else who is on his level in Japan," said Fasol. "He creates an incredible atmosphere in the company and has some exceptional people around him. His personal style is the DNA of the company."‎

Paul Bond contributed to this report.