DreamWorks Animation in Acquisition Crosshairs; Lionsgate Too?

29 Sep, 2014 By: Erik Gruenwedel

Overseas opportunities have some studios primed for third-party offers

Weekend media reports have outlined a possible $3 billion-plus bid from Japanese Internet financial company SoftBank to acquire DreamWorks Animation, a scenario that prompted some Wall Street analysts to suggest Lionsgate could fetch even more.

Although there has been no official announcement, media outlets such as The Wall Street Journal cited sources suggesting the DWA board is mulling SoftBank’s offer that was 50% higher than DWA’s closing stock price Sept. 26.

SoftBank, which last year acquired Sprint and was considering purchasing T-Mobile, owns more than 30% of Chinese e-commerce website Alibaba, which just went public fetching more than $70 billion in an IPO.

At the same time, DWA has an extensive film catalog that SoftBank reportedly seeks to exploit in the Chinese market. In addition, the company could look to meld DWA’s recent acquisition of Web video content creator Awesomeness TV with Sprint by supplying the latter with short-form video content.

DreamWorks Animation CEO Jeffrey Katzenberg has made no secret his desire to sell the studio as it ups TV production in an effort to offset declining box office fortunes. Three of the past five theatrical releases performed poorly compared with expectations, resulting in early financial write-downs for Mr. Peabody & Sherman, Turbo and Rise of the Guardians.

Indeed, home entertainment has help offset some of those theatrical underperformances. Turbo sold an estimated 5.1 million retail units worldwide through the end of the second quarter (ended June 30), while Rise of the Guardians generated revenue of $2 million in Q2, primarily from home entertainment. The film has sold an estimated 5.7 million retail units sold globally, net of actual and estimated future returns.

DWA releases How to Train Your Dragon 2 at retail Nov. 11.

Meanwhile, SoftBank’s interest in DWA prompted Stifel analyst Benjamin Mogil to speculate that Lionsgate would be worth even more — especially considering the mini-major’s increased focus on foreign theatrical and retail markets, including China.

"While we are not necessarily of the view that this is a completely apt comparison, as their franchises and rights differ, we believe it does lend valuation support nonetheless," Mogil wrote in a note.

B. Riley & Co. analyst Eric Wold contends the with the growing foreign box office it makes sense for overseas companies to solidify their global positioning by acquiring Hollywood studios to bring their content and franchises that can be monetized within those countries in more effective manners (when owned by local companies).

Specifically, Wold believes a mid-tier studio such as Lionsgate that is void the distractions of other divisions or businesses typically found at major players such as Warner Bros., Disney and Fox, would likely be preferred.

“We believe Lionsgate, with its solid content library, strong movie franchises, lock on the young adult segment and impressive cash flow, would be an attractive candidate in this environment,” he wrote in a Sept. 29 note.