DreamWorks Animation SKG, Market cap as of 29/04/2016: $3.8bn
Comcast Corporation, Market cap as of 29/04/2016: $147.12bn



Last Thursday April 28, 2016, Comcast Corporation announced after quick merger talks that it would acquire DreamWorks Animation SKG for $3.8bn in an all-cash transaction. DreamWorks Animation will be folded under Comcast’s NBCUniversal in its Universal Filmed Entertainment Group, which counts Universal Pictures, Fandango, and NBCUniversal Brand Development. According to the board, DreamWorks Animation will be a strong addition to Universal’s film portfolio and it will fuel theme park and consumer products sales growth, especially in Asia.


About DreamWorks Animation

DreamWorks Animation SKG Inc is a studio headquartered in Glendale, California. It was formed by the merger of the feature animation division of DreamWorks and Pacific Data Images, but since it was spun-off in 2004 it has operated as an independent company. The company produces features films, television programs, web and new media content and consumer products.

DreamWorks was founded in 1994 by three extremely well known figures in the media industry: Jeffrey Katzenberg, Steven Spielberg and David Geffen. The first was the former CEO of Walt Disney, the second one of the most famous film directors and producers and the third an important music executive. The three contributed $33m each, and managed to obtain an additional $500m from Microsoft co-founder Paul Allen. The founders’ aim was to create a Studio that could compete with Disney in the field of animation. In 1998, DreamWorks released its first two animated films (“Antz” and “The Prince of Egypt”). In 2001, DreamWorks reached its best success with respect to animated films, with the release of the movie “Shrek”.

After the success of Shrek 2, the animation division of the company, under Katzenberg’s control, was spun-off. The unit, valued at about $2.64bn, raised around $725m in the IPO. 29 million shares, making up some 27.5% of the company, were sold at a price of $28 per share. Jeffrey Katzenberg became the CEO of the newly formed company, which started producing solely animated feature movies and television programs.

As of today, the Studio has released 32 animated feature films and has a plan to launch two animated movies per year. In 2015, the company produced $916m of revenue and $16m of operating margin. The founder Jeffrey Katzenberg is still the CEO. However, coupled with its family-friendly box office successes over the years, it recently wrote down investments on not-so-successful movies like The Penguins of Madagascar­– a spin-off of the well-known Madagascar series – and last year it went through a restructuring of its workforce and management.


About Comcast Corporation & NBCUniversal

Comcast Corporation (NASDAQ: CMCSA) was founded in 1963 by Ralph Roberts with the purchase of American Cable Systems, a 1,200-subscriber cable system, in Tupelo, MS. The main mission of the company involves shaping the future of media and technology to bring people the world’s best entertainment and online experiences. This global media and technology leader is composed of several reportable businesses: Comcast Cable, one of the nation’s largest video, high-speed Internet and phone providers to residential and business customers under the XFINITY brand; Comcast Spectacor, which owns and operates the National Hockey League’s Philadelphia Flyers, the Wells Fargo Center venue and Spectra; Comcast Ventures, that has interests in the digital advertising space and give access to some of the largest local ad markets, subscriber bases and Web properties; NBCUniversal, one of the world’s premier media and entertainment firm.

Overall, 2015 was an incredible year for Comcast and NBCUniversal from the strategic, financial, and operational perspectives. Comcast’s revenue increased by 8.3% from FY 2014 and operating cash flow by 7.7%, with an EBITDA margin of 33.39%. The company was also able to return $9.2bn to shareholders, $6.75bn in share repurchases and $2.4bn in dividends. The first quarter of 2016 highlighted a still positive trend, showing an increase in consolidated revenue of 5.3%, as well as an operating cash flow increase of 6.9% and an operating income increase of 5.1%.

NBCUniversal was acquired by Comcast 5 years ago and its performance has exceeded all expectations: operating cash flow has doubled since the acquisition announcement and every part of the company is still showing strong growth. The NBCUniversal division is one of the world’s leading media and entertainment companies in the development, production, and marketing of entertainment, news and information to a global audience. Its revenue in 2015 amounted to $28.46bn, roughly 38% of Comcast’s consolidated revenues, while its EBITDA of $6.4bn reflected an increase of 14.7% over the result from 2014.

As the parent company of NBC, Universal Studios and The Weather Channel (among others), NBCUniversal operates a valuable portfolio of segments:

  • Cable Networks, which provides a variety of entertainment, news, information and sports content;
  • Broadcast Television, which operates the NBC and Telemundo broadcast television networks, which together serve audiences and advertisers in all 50 states;
  • Filmed Entertainment, which primarily produces, acquires, markets and distributes both live-action and animated filmed entertainment worldwide, such as Despicable Me and Minions -the segment’s revenues in 2015 reached $7.3bn, its EBITDA $1.23 bn;
  • Theme Parks, which consists primarily of Universal theme parks in Orlando, Florida and Hollywood.

All these businesses operate in an intensely competitive, consumer-driven and rapidly changing environments and compete with a growing number of companies that provide a broad range of communications products and services and entertainment, news and information content to consumers. Technological changes are further intensifying and complicating the competitive landscape and influencing consumer behaviour.


The Competitive Landscape in the Filmed Animation Industry

As Comcast operates in the media and entertainment industry, which consists of movies, TV shows, radio, music, magazines, and books, its top competitors include The Walt Disney Company, Time Warner Inc., McGraw-Hill Companies, DIRECTV Inc., Viacom Inc. Recently media and entertainment companies had to figure out ways to adapt to huge technological developments while still attracting consumers and staying solvent. There are currently strong expectations of growth in entertainment revenue. Indeed, global total filmed entertainment revenue is expected to rise at a 4.1% CAGR to 2019, reaching $104.62bn in the US. Particularly intense growth will be seen in China (14.5% CAGR) and in Latin America, but the US, with 33.0% of the total market in 2014, will see above-average growth of 4.6% CAGR. A clear trend everywhere signals the importance of local films in boosting country box office revenue and, even if Hollywood still dominates, local films will surely make a stronger impact. In fact, China’s box office revenue is forecast to rise at a 15.5% CAGR, an outstripping result compared to every other market surveyed.


Deal Structure

From a technical standpoint the deal does not show complexity. Comcast committed itself to buy DWA’s stocks at $41 per share in an all-cash transaction. The offering price implies a 27% premium with respect to Wednesday’s closing price and the value of the deal is $3.8bn, indicating an enterprise value of $4.1bn including the company’s debt. The boards of both companies involved in the deal have approved the transaction, which is expected to close by the end of 2016.

The transaction needs to be approved by the regulators after an antitrust review. Therefore, the agreement includes a reverse breakup fee of $200m that the bidder Comcast will pay to DreamWorks Animation in case the regulatory authority does not approve the deal.

DreamWorks Animation will become part of the Universal Filmed Entertainment Group. Following the deal, Jeffrey Katzenberg will resign as CEO of the Studio and will be the chairman of the new entity DreamWorks New Media, composed by the company’s ownership stake in video company AwesomenessTV(an online studio and distributor targeting teenage girls) and its tech company Nova, which uses 3-D animation for marketing campaigns. In addition, he will serve as a consultant to NBCUniversal. Mr. Katzenberg’s 11.4% stake in DreamWorks Animation will make him $408m from the sale, and he will also earn $21.9m as a change-in-control package.


Deal Rationale

Comcast’s acquisition of DWA hails from the desire to exploit growth in the theme-park business and in merchandises sales, stirring away from pay TV, threatened by digital forces. Indeed, when NBCUniversal was bought 5 years ago the most attractive segment for Comcast consisted of cable channels, including USA, E!, Bravo and Syfy. At the time, pay TV growth seemed unstoppable, but now it does not look like an ideal investment anymore – big cable channels lose subscribers as consumers switch to streaming video cutting off expensive TV packages. NBCUniversal itself has lost 4 million homes in its subscriber base over the last 2 years, and its competitors are looking into expanding in foreign TV markets (for example, Discovery Communications has invested to expand in Europe). Furthermore, media conglomerates have also started investing more on digital outlets – NBCUniversal invested $200m in new-media rising star Buzzfeed last year.

Coupled with investments in the digital space, Comcast has tried to emulate Disney’s strategy of monetizing successful movies with merchandise, theme-parks rides, and new-media programming. Indeed, over the last 5 years, Comcast has constantly enriched its portfolio by enhancing its ownership of content and by investing in its theme parks business and consumer products. It doubled its theme-park revenue between 2010 and 2015. On these lines, with the strong willingness to boost its content with acquisitions, last year Comcast planned the $45bn takeover of Time Warner Cable, which however did not go through due to regulatory issues.

Even though Disney is much bigger than NBCUniversal, counting five times as much in theme-park revenue, its transformation and focus act as a key model strategy for media companies. With this deal, as Disney did with Pixar and Marvel Entertainment, for example, NBCUniversal is aiming at fueling theme-park revenue and merchandise sales thanks to DWA’s children franchises and popular content such as Shrek. According to NBCUniversal’s executive Mr. Burke DWA’s intellectual property like Minions, Jurassic World, or Shrek can be leveraged across film, consumer products and theme parks in a very impactful way, as the cable business is slowing down even though it remains profitable.

Hoping to extract synergies by folding DreamWorks Animation into its Universal Pictures unit, Comcast is looking to boost its expansion in Asia as well. It started focusing more on China and Japan, recently, building a $3.3 Universal Studios park in Beijing and buying a majority stake in Universal Studios Japan. As China is expected to become the largest film market in a few years to come, NBCUniversal could also leverage DWA’s recent investments there such as Oriental DreamWorks, a joint venture with state-owned China Media Capital, Shanghai Media Group, and Shanghai Alliance Investment, which co-produced the widely successful Kung Fu Panda 3 with DreamWorks Animation.

Recently, DreamWorks Animation also had talks with SoftBank, the Japanese technology group, Hasbro, the American toymaker, and most recently Dalian Wanda, the property and media group controlled by Wang Tianlin China’s richest man, but all negotiations failed.


Market reaction 

The $41 price marked a premium to Wednesday’s closing price of 27.3% and a 51.2% premium to DreamWorks Animation’s Tuesday close before the stock started going up amid news of the deal talks. Comcast’s stock also rose early on Thursday, up 0.5% at $61.58.


Financial Advisors

DreamWorks Animation was advised by boutique investment bank Centerview Partners Holdings LLC, while Comcast did not list a financial adviser.

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