DreamWorks Animation Stock Jumps as Wall Street Debates Deal Outlook

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A $32 per-share takeover "would be a gift" to current shareholders, says one analyst as some question the rationale for a deal

Shares of DreamWorks Animation soared in early Monday trading as Wall Street debated SoftBank's interest in the studio.

As first reported by The Hollywood Reporter, the Japanese telecom and tech giant has discussed a possible acquisition of the company for $32 per share. The studio is led by CEO Jeffrey Katzenberg.

On Monday, DWA's stock opened up about 20 percent and traded up around 16.7 percent at $26.01 as soon as of 9:35 a.m. ET but still well below its 52-week high of $36.01 and the $32 per-share price discussed in a possible sign that investors had some doubts that a deal would happen. The stock had closed Friday at $22.36. SoftBank's stock trended lower in Japan on Monday.

Analysts on Monday chimed in on a potential deal following weekend discussion of its possible benefits for SoftBank.

B. Riley & Co. analyst Eric Wold said, "SofBbank could leverage strong franchises/library undervalued by recent box-office flops."

C‎owen & Co. analyst Doug Creutz wrote: "We believe DreamWorks [Animation] has attempted to find buyers in the past, and a sale would solve the existential question of what to do given a very uneven track record at the box office and a lack of meaningful profitability over the past three years."

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He cautioned that from Softbank's end, "this appears to be about media empire building, with DreamWorks [Animation] potentially joining its portfolio of fully and partially owned companies, including Sprint, Gung Ho Entertainment, Yahoo Japan, Alibaba and SB Creative (as well as an unsuccessful bid for Vivendi Music)."

He added, though: "We think it is hard to justify the premium SoftBank is reportedly offering. There appears to be little strategically interesting about the deal, in our view. We don't see a lot of rhyme or reason to the pattern of vaguely related assets SoftBank is rolling up; this looks more to us like conglomeratization."

He concluded that the $32 per share offer "would be a gift to current DreamWorks [Animation] shareholders."

Morgan Stanley analyst Benjamin Swinburne wrote: "We view this as a positive read for large-scale content production asset values — both film and TV — but it likely has limited read across to media cos that are largely driven by U.S.-centric distribution networks (versus more global content production/IP). For DWA, its apparent willingness to sell on 'depressed' earnings (after writing down three of its last five films) suggests DWA may see a continued tough outlook given flattish U.S. box office and home video spend and a highly competitive animation space."

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While possible, it is far from clear how DWA's content would advantage Softbank's pipes. For Softbank — or any tech company looking at media — the deal is likely driven by the desire to acquire powerful IP at reasonable investment levels with hope that, over time, leveraging vertically integrated content will create advantages as competition intensifies. However, across the media industry, we see continued debate about what benefit can be reasonably derived from vertical content/distribution integration (with disparate corporate actions reflecting a clear lack of industry consensus). For Softbank, it is unclear how DWA's content can be used to create a meaningfully differentiated offering, particularly in light of DWA's relatively limited annual production volume. ‎

Email: Georg.Szalai@THR.com
Twitter: @georgszalai