The most powerful executive in Hollywood lives in Philadelphia, it seems. Comcast CEO Brian Roberts strengthened that case today by agreeing to pay $3.8 billion to add DreamWorks Animation to his NBCUniversal operation — which is attached to the nation’s largest collection of cable TV and broadband systems.
What does that mean for the companies? Comcast and DWA are still working out details after a whirlwind negotiation that became more urgent Tuesday night when word of the talks leaked. This morning the companies put out a simple press release without a conference call to brief Wall Street or extensive SEC filings providing financial details.
What is known: DWA’s animation operations will become part of Universal Filmed Entertainment Group while co-founder and CEO Jeffrey Katzenberg consults for NBCUniversal and becomes chairman of DreamWorks New Media — a potential spinoff candidate. He’s scheduled to talk with analysts on May 5, when DWA releases its Q1 earnings.
Here’s the apparent rationale for the deal, and state of play for the newly engaged companies:
Q: Why does Comcast want DWA?
A: Executives say that DWA will help NBCUniversal’s film animation and consumer products businesses, develop characters for theme park attractions, and provide TV shows for kids.
Q: That’s it?
A: DWA is cheap.
Q: Cheap? Analysts say that Comcast’s paying a high price for DWA.
A: This depends on your perspective. True, the $41-a-share offer is 51% higher than DWA sold for before news about the talks leaked. But the studio’s shares were beaten up in the beginning of 2014, and have been stuck in neutral since then.
Q: Still, $4.1 billion is a lot of money.
A: Comcast can buy DWA without breaking a sweat. It has a market value of nearly $150 billion, making it 36.5 times bigger than DWA. The cable giant says the deal won’t interfere with its vow to spend $5 billion this year repurchasing shares. It apparently didn’t hire an investment bank to help with the deal. And its investors don’t seem to care: Comcast shares are up less than 1% since Tuesday.
Q: Will Comcast be able to find any savings or synergies at DWA?
A: The company apparently believes it can. Comcast says the purchase price represents a “high single digit operating cash flow multiple.” Wells Fargo Securities’ Marci Ryvicker did the math and says that translates to $300 million a year in savings or synergies. PiperJaffray’s Stan Meyers sees $250 million including $50 million from higher film splits with theaters, $50 million in distribution fees, $50 million from film budget expenses, and $100 million in overhead.
Q: Why was DWA beaten up?
A: DWA lost money on four of the 10 films it released prior to January. It recorded write-downs for Rise Of The Guardians, Turbo, Mr. Peabody And Sherman, and Penguins Of Madagascar. Katzenberg cut costs — including 500 layoffs — and diversified into other businesses, especially television and new media.
Q: How did its prospects look before it made the deal with Comcast?
A: Cloudy. DWA still makes most of its money from feature films, and some analysts recently lowered their earnings estimates. International sales for Kung Fu Panda 3, released in January, are coming in below Wall Street expectations. DWA won’t have another chance to impress investors until November, when it releases Trolls. That’s a lot of pressure to put on one film — especially one that opens the same weekend as Marvel’s Doctor Strange and two weeks before Warner Bros.’ Fantastic Beasts And Where To Find Them.
Q: Did Katzenberg panic?
A: He has been trying to make a deal for years, and had serious talks that didn’t pan out with Hasbro and SoftBank. But the threats to his stock price might have added some urgency to his conversations with Comcast. The deal came together quickly: Early this month DWA agreed to sell a 24.5% stake in AwesomenessTV, which it controls, to Verizon. That likely wouldn’t have happened if the studio believed it was about to be bought by Comcast.
Q: Does the deal with Comcast face any obstacles?
A: Probably not. Katzenberg controls 60% of DWA’s voting shares.
Q: How about federal antitrust regulators?
A: Either the Justice Department or FTC could sue to block the acquisition. DOJ opposed Comcast last year when it wanted to pay $45 billion for Time Warner Cable. But it’s hard to imagine that regulators would oppose Comcast’s acquisition of DWA to compete with Disney which has its own animation studio, Pixar, Marvel, and Lucasfilm. If the feds reject Comcast’s deal with DWA, then the cable power will have to pay a $200 million breakup fee.
A: Yes. DWA says it’s cooperating, but can’t estimate how long the investigation will last, or how it might pan out.
Q: DWA has deals that might conflict with Comcast’s interests.
A: Right, although they don’t appear to be too troublesome. DWA’s film and home video distribution deal with Fox, signed in 2012, includes a provision allowing it to terminate if there’s a change in control. In January, DWA expanded its multi-year agreement allowing Netflix to offer its films in the premium TV window and providing the streaming service with original kids’ programming. There’s also Verizon’s involvement with AwesomenessTV.
Q: What exactly is Comcast buying?
A: DWA consists of five units: Feature Films accounted for about 57% of DWA’s nearly $916 million in revenues last year. Television Series and Specials contributed 25%. Consumer Products kicked in a little more than 9%. A New Media unit, which is primarily DWA’s 50.5% interest in AwesomenessTV, offered 8%. And an Other segment that includes its live performances and licensing of its software tools was less than 1%.
Q: What about Oriental DreamWorks?
A: DWA agreed in 2013 to pay $50 million for 45.5% of Oriental DreamWorks, a joint venture with China Media Capital Center, Shanghai Media Group, and Shanghai Alliance Investment. It’s designed to create content that will appeal to Chinese audiences, and is run by its own board of directors. DWA has paid $17 million of the amount it owes with the rest due by the end of 2017.
Q: Anything else at the company?
A: DWA ended last year with 2,300 employees. Most work at its Glendale, CA campus, which consists of 10 buildings on about 14.7 acres. Last year DWA sold it for $185 million, with a 20-year lease-back agreement. The studio pays $13.2 million a year, increasing 1.5% per year.
Q: Does DWA have much debt?
A: Yes. It owed $360 million at the end of 2015. That includes $300 million in Senior Notes due in 2020 on which it’s paying 6.875% a year in interest. Moody’s considers it speculative, meaning it’s too risky for many pension funds and banks to buy.
Q: Is DWA profitable?
A: Not consistently. It lost $54.8 million last year and $309.6 million in 2014, but made $55.1 million in 2013.