Jeffrey Katzenberg’s desire to sell the studio he founded has been Hollywood’s worst-kept secret for years. So why can’t he make a deal?
©DreamWorks/Courtesy Everett Collection ©DreamWorks/Courtesy Everett Collection
In a July 30 note following DreamWorks Animation's second-quarter earnings, where it reported a $15.4 million loss, Cowen and Company analyst Doug Creutz listed as one of just two potentially positive scenarios ahead for the animated studio founded by movie mogul Jeffrey Katzenberg that it "becomes an acquisition candidate." The other was that the average box office performance of its upcoming slate of films beats expectations.
Both, however, are thought by sources to be long shots.
"The film lineup looks poor at best," said BTIG analyst Richard Greenfield, who has a sell rating on the studio's stock and says it is worth $15.50 per share.
For the first time in his 40-year movie career, Katzenberg's performance is being seriously questioned by both Wall Street analysts and Hollywood peers. As an independent studio not tethered to a larger organization in the cost-heavy field of animated movies, his studio is overly dependent on the box office performance of individual films to meet its financial targets. Further, DreamWorks Animation's business model of only producing two to three movies per year has suffered from the dual realities of increased competition in family films and an overall downward trend in attendance at the domestic box office. These factor have resulted in a confluence of negative events recently, ranging from missed earnings to losses on poorly performing films to a U.S. Securities and Exchange investigation into a recent Katzenberg stock sale, that have raised questions about DreamWorks Animation's future.
Yet DreamWorks Animation shares are currently trading significantly higher than Greenfield's target, closing trading Tuesday at $23.99, primarily buoyed in recent weeks by a short-lived rumor that Japan's SoftBank was in talks to buy the studio for $3.4 billion. The rumor was fueled, in part, by one of Hollywood's worst-kept secrets: Katzenberg has been trying to sell DreamWorks Animation for years.
A DreamWorks Animation representative declined to comment or make Katzenberg available for an interview for this story.
Katzenberg isn't trying to sell his studio because he needs the money — he's among the richest men in the world with a net worth somewhere between $860 million and $957 million depending on who is doing the calculating. His goal has always been to use a sale of the studio to leverage himself into a bigger job at a larger organization — and get out from under the glare of Wall Street.
The now derailed talks with Softbank dovetailed nicely with that objective. The Japanese telecommunications and internet giant, newly flush with billions of dollars from the Alibaba IPO, is by all accounts looking to spend its way into Hollywood. Its initial interest in DreamWorks Animation likely stemmed from the fact that animated movies, unlike comedies or dramas, play well to an international audience, and DreamWorks Animation's just happen to perform especially strong in Asian markets.
But multiple sources told BuzzFeed News that Softbank soon realized that, as one Hollywood executive who requested anonymity for fear of damaging relationships put it, "when you dig into the cost structure versus revenue and profits you see that [the studio's] business model doesn't make a lot of sense."
©DreamWorks/Courtesy Everett Collection ©DreamWorks/Courtesy Everett Collection
Katzenberg began his film career at Paramount Pictures before moving on to Walt Disney Studios, where he had a spectacular decade-long run that included overseeing such animated classics as The Little Mermaid, Aladdin, The Lion King, and Beauty and the Beast, the first animated movie to receive a Best Picture nomination. He left Disney in 1994 after a falling out with then-CEO Michael Eisner and went on to found DreamWorks with partners David Geffen and Steven Spielberg.
In 2004, with the blessing of Geffen and Spielberg, Katzenberg spun out DreamWorks Animation and took it public on the strength of his reputation and the then-budding Shrek franchise.
But independent film studios are only as valuable as their most recent hit, which is why there are so few of them, particularly on the public markets. Hollywood and Wall Street have always had trouble understanding each other mainly because the former is a highly volatile hits-driven business while the latter likes stable companies with reliable earnings growth and cash flow generation. The disconnect is magnified for DreamWorks Animation since it produces just two or at most three films per year.
As a second movie studio executive who also requested anonymity said, "When you only make two movies a year, you better make sure one of them isn't a flop otherwise you're in trouble."
Since 2012, however, DreamWorks Animation has had to record a total of $157.5 million in losses on three movies — Rise of the Guardians, Mr. Peabody and Sherman, and Turbo. While the amount of the write-downs isn't large by movie industry standards — Disney took a $200 million loss on John Carter alone in 2012 — they have resulted in extremely volatile swings in the studio's stock price and earnings because its business model is tilted so heavily toward the box office performance of its films. For the full year 2013, for instance, DreamWorks Animation recorded a profit of $55 million, while for 2012 it posted a loss of $36.4 million.
Unlike bigger media conglomerates such as Time Warner or Disney, DreamWorks Animation lacks cable networks to help offset box office misses. Its library of movies, which studios rely on to provide a steady source of revenue through DVD sales, licensing for video-on-demand, streaming, and syndication, is small by industry standards, featuring less than 30 films in total, with just a handful of them like Shrek or Kung Fu Panda hits whose rights can be sold in perpetuity. (Libraries need hits after all, since no one wants to license a movie nobody wants to watch.) By comparison, Warner Bros.' film library ranks as the world's largest, with the rights to around 6,500 movies, among them franchises like Harry Potter and Lord of the Rings that will be in demand among audiences for decades to come and will provide the studio with a lucrative annuity.
Further, animated movies are among the most expensive to make, with historic budgets for DreamWorks Animation's films averaging around $145 million. The studio also uses 20th Century Fox to distribute its films, paying that studio an 8% fee to do so. And DreamWorks Animation is rare among animation studios in that its movies are made almost entirely in-house.
A source close to DreamWorks Animation said that the studio "takes pride" in the fact that it makes its movie in-house and that it believes it "distinguishes them and the movies they make." But to Wall Street analysts and, more importantly, potential buyers, that simply means high overhead costs for staffing — the studio had 2,200 employees as of Dec. 31, 2013. By comparison, Lions Gate Entertainment, another independent publicly traded studio, has 650 full-time employees.
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