DreamWorks Animation Deal Talks Sabotaged by Anonymous Letter

Courtesy of Dreamworks; AP Images; iStock

THR was among outlets that received the highly detailed missive as negotiations with Hasbro broke down after an irate Disney caught wind

This story first appeared in the Nov. 28 issue of The Hollywood Reporter magazine.

The termination of merger talks between DreamWorks Animation and Hasbro has plunged the company behind Shrek and Penguins of Madagascar into a state of high anxiety.

The stalled Hasbro negotiation is the second in recent weeks to be leaked to the media only to be declared dead within 48 hours. THR revealed Sept. 27 that Japan's SoftBank was interested in buying DWA for as much as $3.4 billion. Around that point, however, SoftBank CEO Masayoshi Son had started to cool to the idea. DWA was angling to sweeten the price when news of the talks broke and the potential deal was scuttled.

It is unclear whether that leak was in part to blame, but the news motivated Hasbro, which is said to have first toyed (so to speak) with the idea of acquiring DWA two years ago. No serious talks took place then, but Hasbro recently had been prepared to engage in a substantive discussion. In the wake of the SoftBank leak, a knowledgeable source says DWA tried to hold information about the conversation as close to the vest as possible. Nonetheless, news of those prospective talks soon became known.

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Certainly the leak did damage, as Hasbro's stock slid nearly 5 percent (and DWA's stock spiked). But there was another major obstacle to a deal: Sources confirm that incensed Disney executives conveyed to Hasbro CEO Brian Goldner that they would deem the toy manufacturer a competitor should it acquire DWA, imperiling huge contracts involving Marvel, Star Wars and, per a very valuable agreement set to begin in 2017, princess merchandise from Frozen and other titles. Deals with Disney are estimated to generate nearly a third of Hasbro's business. A source with knowledge of events says Disney execs had "a nuclear-level reaction" to the talks with DWA. Both Disney and Hasbro declined comment.

Suffering from a recent spate of underperforming movies, DWA's stock is off 37 percent this year and saw a one-day drop of 14 percent to $22.31 per share Nov. 17 in the aftermath of the Hasbro discussions. Though DWA was the one approached by both SoftBank and Hasbro (although it is not officially for sale), two aborted negotiations made public in less than two months risks casting the company as "the girl nobody wants to date," as one industry executive puts it. Though negotiations and deal discussions run rampant in Hollywood, more often than not without consummation, the public nature of CEO Jeffrey Katzenberg's talks can make for bad PR for a publicly traded company. "Repeated efforts to sell reflect poorly on DreamWorks Animation and especially on Katzenberg," says Steve Birenberg, president of investment advisory firm Northlake Capital Management.

No doubt, DWA has been subject to an unusual amount of leaks around its private talks, a level of activity that has the whiff of an agenda. The company was rattled to learn of an anonymous, highly detailed, lengthy letter recently mailed to several press outlets — including THR — apparently with the goal of derailing the Hasbro deal. Not only did the letter spell out details of the discussions, it also disclosed DWA talks to sell Hearst Corp. a 25 percent stake in AwesomenessTV for $81.3 million (DWA paid $33 million for the teen-skewing digital company in 2013).

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Further, even as every studio fights to find optimal release dates for their films, DWA is the only one whose share price fluctuates largely based on its calendar and individual movie performances. The anonymous letter suggested upcoming issues with DWA's release schedule — information that seems to have been at least partially confirmed when sources said Nov. 17 that DWA will move B.O.O.: The Bureau of Otherworldly Operations out of summer 2015, at least in part due to dissatisfaction with its creative direction. Meanwhile, the company's holiday movie for 2015, Kung Fu Panda 3, is walking into a firestorm as it is set to open Dec. 23, just days after Disney's Star Wars: Episode VII — The Force Awakens hits theaters Dec. 18. Other upcoming big bets: Boss Baby currently is set for 2016; Bollywood Monkey Superstar, not yet in production, is set for 2017.

The company had not previously disclosed changes to its release schedule, though Katzenberg said in an Oct. 29 earnings calls that DWA would be "flexible" in dating its movies, adding, "You can look at our release schedule as the intent of the moment. I just have to say, every time something happens in the marketplace, we're going to respond to that in the most offensive way we can to protect the performance of those films."

DWA, whose movies are distributed through 20th Century Fox in a deal that runs through 2017, has faced losses on recent releases, including Mr. Peabody & Sherman and Turbo (and has disclosed that it is facing SEC scrutiny over the write-down on the latter film). But one executive with ties to the company says that despite its misses, DWA overall has had "a really good track record" with numerous films that grossed more than $500 million worldwide, including The Croods ($587.2 million) in 2013 and How to Train Your Dragon 2 ($618.8 million) this year.

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Still, the recent developments are unlikely to help Katzenberg sell DWA for the type of premium that the company seems to feel makes it worthwhile. Even after the Hasbro talks leaked, shares rose only 14 percent and remained 37 percent below what is believed to be Katzenberg's target price of $35 per share, indicating investors weren't confident a deal would close at that price. The median price target of Wall Street analysts who cover the stock is just $22, or 59 percent below what Katzenberg seems willing to accept.

Given the collapse of potential deals with SoftBank and Hasbro, it seems for now that DWA will continue to rely on the performance of its movies and pursue diversification where it can. BTIG analyst Rich Greenfield, who has long been negative on DWA, sees little hope for a sale at the kind of price that DWA has been seeking. "The problem is, at the end of the day, it's a movie studio," he says. "Not everybody gets a Hollywood ending."