DreamWorks Animation Shares Soar, Hasbro Falls as Wall Street Mulls Merger

2012-40 FEA NextGen Jeffrey Katzenberg H

DWA's chief urges THR’s Next Gen to give back.

Analysts have doubts about the potential merger

Investors have weighed in on the notion of toymaker Hasbro acquiring DreamWorks Animation. They love the idea -- and they hate it, depending on which company they are invested in.

On Thursday, the first day of trading since word leaked of the merger talks,  shares of DreamWorks Animation soared 14 percent to $25.52, while Hasbro shares sunk 4 percent to $54.98.

By the end of trading, DreamWorks Animation had increased its market capitalization to $2.2 billion after ending a day earlier at $1.9 billion. Hasbro, on the other hand, fell to $6.9 billion from $7.2 billion a day before. Both stocks traded on heavy volume.

The activity comes a day after insiders confirmed to The Hollywood Reporter that DreamWorks Animation is in early negotiations to merge with Hasbro, which could pay as much as $35 a share for the studio run by CEO Jeffrey Katzenberg. Even after the big gain Thursday, the stock only closed at $25.52, so it has plenty of room to keep running, assuming investors buy into the idea that a deal could be struck for a price that amounts to a 37 percent premium to Thursday's close.

On Thursday, though, the companies still were not commenting on the negotiations, not even to acknowledge that they exist. 

Analysts, meanwhile, seem to like the idea from DreamWorks Animation's perspective but aren't as bullish from Hasbro's point of view. 

Eric Wold at B. Riley & Co. writes in a report that the studio behind the Shrek and Madagascar franchises could be attractive thanks to the "meaningful value within DreamWorks’ content library and character franchise portfolio that has been weighed down in the stock market by the underperformance of the studio’s recent films."

But Drew Crum at Stifel believes that DreamWorks Animation's pictures "have not translated as well in the toy aisle," meaning that "Hasbro would be placing confidence in DreamWorks Animation's content cycle and its ability to monetize this intellectual property at retail."

He says that the move would be risky for Hasbro because of the capital requirements and return profile of the film business. He also points to the favorable reaction when Hasbro reduced its stake in a joint venture with Discovery Communications on a kid's cable network.

Eric Handler at KM Partners is even more dire in his assessment, delivered in a report that's headlined, "Multiple Reasons Why a DreamWorks Animation Acquisition Does Not Make Sense."

"There is no doubt that Hasbro wants to turn a number of its franchise properties into feature films, but its risk profile would substantially change entering into the volatile movie production business with a company that has not generated positive free cash flow in several years and has had trouble making profitable animated films," he writes. "In addition, a business transformation of this magnitude could have negative implications for Hasbro in its relationship with Disney."

Nevertheless, insiders say a merger is the quickest way for both companies to realize their goals of diversification. Hasbro, a company headquartered in Rhode Island with 5,500 employees, has been broadening its reach into movies and TV through its partial interest in the Discovery Family TV channel and its Allspark Pictures. DreamWorks Animation, on the other hand, has long recognized the importance of the sort of year-round sales that could come with a stronger push into consumer products and live-action TV and film programming.

On Thursday, though, the analyst throwing the most water on the idea of a merger was arguably Vasily Karasyov, who wrote: "We don't see a plausible argument for why Hasbro would pay 41 percent of its current market capitalization for a company which, according to its CEO, is facing serious challenges. Films profitability continues to decline and the ramp in consumer product revenue the bulls hoped for isn't coming."