DWA Dreamworks Animation Skg, Inc. (MM)

By Shalini Ramachandran and Ben Fritz 

Two weeks ago, Comcast Corp. executives were tipped off that DreamWorks Animation SKG Inc. -- the studio behind "Shrek" and "Kung Fu Panda" and the focus of perpetual takeover rumors -- was finally getting sold.

The cable giant's chief executive, Brian Roberts, and the head of its NBCUniversal media unit, Steve Burke, called DreamWorks honcho Jeffrey Katzenberg to ask if it was true, according to Mr. Burke. Mr. Katzenberg, who was in a car at the time, picked up and told them he was in talks with a Chinese buyer to take the company private, but "if you're interested, we'd love to talk to you," Mr. Burke recalled.

Messrs. Burke and Roberts flew out to Los Angeles immediately. After a whirlwind of deal-making and all-nighters, which included Comcast executives sneaking around the DreamWorks studio lot hoping not to call attention to themselves, the companies announced a $3.8 billion deal Thursday.

Comcast's intense pursuit of DreamWorks Animation highlights just how much has changed across the media landscape in the five years since it acquired NBCUniversal. At the time, the primary attraction for Comcast was the cable channels -- USA, E!, Bravo, Syfy and others -- which promised to benefit from the pay-TV industry's seemingly unstoppable expansion and revenue growth.

Now, pay TV's future looks much less rosy, with consumers increasingly cutting the cord or switching to cheaper billing plans. And Wall Street isn't likely to be impressed by companies that spend their time doubling down on their U.S. cable networks. Big TV channels across the dial, from ESPN to AMC, are losing subscribers. NBCUniversal's USA now reaches four million fewer homes than it did in 2013, and its prime-time audience is down 6% this season.

That environment explains why media giants are looking pretty much anywhere else but the nation's conventional cable networks for growth. They have placed bets on global TV markets, as Viacom Inc. and 21st Century Fox have done in India and Discovery Communications Inc. has done in Europe. They've wagered on digital outlets, as Comcast did last year with investments in BuzzFeed and Vox Media, and Walt Disney Co. did with Vice Media.

And they have looked to make their film and TV divisions launchpads for merchandise, theme-parks rides, and programming for new media platforms.

NBCUniversal sees many attractions in the DreamWorks deal. For starters, animated content -- whether film or TV -- tends to "travel" better to foreign markets than regular scripted fare.

It also drives consumer-products sales, a business that generates close to $500 million annually, and is likely to get a big boost from DreamWorks-owned characters like Po, the "Kung Fu Panda," the penguins of "Madgascar," and the "Trolls," who will get their own movie in November.

And it is expected to be a boon to NBCUniversal's Universal theme parks unit that has more than doubled between 2010 and 2015 last year and is planning a new park in Beijing.

"How great will it be to have 'Kung Fu Panda' in our park when Beijing opens?" Mr. Burke said in an interview.

NBCUniversal has a long way to go to join the same league as Disney, which clocked $4.5 billion in consumer-products revenue last fiscal five times as much revenue from its theme parks.

Universal Pictures' cupboard was virtually bare of franchises when Comcast bought the studio, but in the past several years it has built up several including "Jurassic World," "Pitch Perfect" and the animated "Minions," which the DreamWorks properties will join.

The Dreamworks deal is the signature move thus far in the 57-year-old Mr. Burke's five-year tenure.

"In a fragmented world, if you have really powerful intellectual property like 'Minions' or 'Jurassic World' or 'Shrek,' you can leverage it across film, consumer products and theme parks in a way that makes a tremendous impact," he said.

Mr. Burke says the cable business is a "very profitable and good business," but has acknowledged it won't continue to grow like it did a decade ago. The theme-park business, he says, has "tremendous growth potential ahead of it."

The $41 a share that Comcast agreed to pay for DreamWorks represents a premium over 27% to DreamWorks' close on Wednesday and a premium of 51% over its closing price on Tuesday, before The Wall Street Journal reported the companies were in merger talks.

Once the deal closes, Mr. Katzenberg would leave the animation studio and become chairman of DreamWorks New Media, a venture that will hold NBCUniversal's interests in YouTube network Awesomeness TV and 3-D technology business NOVA.

Mr. Katzenberg's 11.4% stake in DreamWorks would make him $408 million from the sale, on top of a change-in-control package valued at $21.9 million, according to the company's proxy filing.

DreamWorks will become part of Universal's filmed entertainment group, though its status as a production operation has yet to be determined. It has four more movies scheduled for release through 21st Century Fox's 20th Century Fox as part of a deal that expires next year. Other movies, including "How to Train Your Dragon 3," have been announced for 2018.

Comcast's plan is to have the head of its Illumination Entertainment animation unit, Chris Meledandri, oversee operations at DreamWorks and determine what it should produce going forward, according to people with knowledge of the matter. That could mean significant cut and layoffs at DreamWorks. Universal executives regard Illumination, producer of the "Despicable Me" series," as one of their crown jewels.

--Anne Steele and Erich Schwartzel contributed to this article.

(END) Dow Jones Newswires

April 28, 2016 17:43 ET (21:43 GMT)

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