UPDATE, 9:24 AM: DreamWorks Animation shares are up 22.1% mid-day on reports that SoftBank might buy the independent studio. But the trading price, at about $27.30, remains well below the $32 under discussion, suggesting there’s still some skepticism that the deal will happen. That price “would be a gift to current DreamWorks shareholders,” Cowen and Co’s Doug Creutz says. “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.”
Morgan Stanley’s Ryan Fiftal and Benjamin Swinburne also note that CEO Jeffrey Katzenberg’s apparent desire to sell at a time when his stock price so low it suggests “DWA may see a continued tough outlook” at the box office. What’s more, even if Katzenberg signs a contract to stay for five years, “over time it may prove difficult to attract creative talent to work in a division of a large, non-media-focused conglomerate.”
PREVIOUS, 6 AM: The studio’s stock is up about 27% in pre-market trading — to $28.40, a level the company hasn’t seen since March — following reports over the weekend that SoftBank is poised to offer to buy it for $3.1B, or $32 a share. That suggests investors see the Japanese Internet and telecom power, which recently took control of Sprint, as a plausible acquirer. DreamWorks Animation shares are off 37% so far this year after it took writedowns on three of its last five films: Mr. Peabody And Sherman, Turbo, and Rise Of The Guardians. SoftBank “could be attracted to the opportunity to acquire a solid U.S. studio at a beaten-down valuation,” B. Riley’s Eric Wold says this morning. DWA “still has a valuable content library and character franchise,” Stifel analyst Benjamin Mogil also notes that SoftBank’s past bid for Universal Music “signals a desire to own content” and has “a stomach for content companies in the mmidst of large-scale changes in consumption patterns.”
SoftBank is especially interested in content that could sell in China, where it’s holdings include Internet video provider YouKu. “DWA is distinguished by its heavy Asian emphasis, including the Oriental DreamWorks venture that will co-product Kung Fu Panda 3 and significant consumer products efforts,” Wunderlich Securities’ Matthew Harrigan says. “SoftBank could also use popular DWA characters such as Shrek to brand and market mobile services globally.”
Industry watchers also will want to see whether the deal talk at DWA leads investors to think more highly of medium-sized studios lead by Lionsgate, whose shares are +3.5% to $32.30 pre-market. If DWA is worth $32 a share, then that would suggest a valuation of as much as $67 for Lionsgate, Harrigan says. Wold also sees a connection, observing that Lionsgate “with its solid content library, strong movie franchises, lock on the young adult segment and impressive cash flow ramp would be an attractive candidate in this environment” — with shares potentially worth $57.
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