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Market Insight

DreamWorks Animation acquisition will invigorate Universal

May 03, 2016  | Subscribers Only

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NBC Universal parent company Comcast has agreed to buy DreamWorks Animation (DWA) in a deal worth $3.8 billion. DWA, formed when company was split from its sister live action unit in 2004, counts some of the most successful animated franchises of all time, including Shrek, Kung Fu Panda and Madagascar.The deal is worth $41 per outstanding share to DWA shareholders. Regulatory clearance is expected to be given by year end. 

Jeffrey Katzenberg, who controlled Dreamworks Animation, will head up an arm of the new group, Dreamworks New Media. 

Our analysis
The acquisition makes sense for Comcast on many levels. DWA is the leading non-major movie producer available for a company like Comcast to buy. Most obviously, the acquisition will help make Universal Studios more competitive in the film space. And at the same time the company’s theme park business will gain access to new brands. What’s not so obvious is the effect that the acquisition will likely have on its cable network business. 

Dreamworks is one of the few animation powerhouses in the market, and this deal brings NBC Universal into direct competition with Disney. Dreamworks’ most successful franchise is the Shrek series of films, which ended in 2010, suggesting that the slate needs refreshing. Still with market resonance are Madagascar, Kung Fu Panda, How To Train Your Dragon and The Croods but they have not reached the box office heights of Shrek (the most successful film in the series was Shrek 2). The Dreamworks brand joins Illumination Entertainment (producer of Despicable Me, Minions and The Lorax) within the NBC Universal stable of animation houses. 

In terms of wider market impact, this deal fits into a logic of consolidation of content. The acquisition of content to exploit in growing markets (such as the Asian cinema market) is firmly on the agenda in Hollywood, with Chinese group Wanda having already acquired Legendary Pictures, Disney acquiring LucasFilm (for about the same amount as this deal) and further back Disney acquiring Pixar and Marvel (also for $4 billion). Those deals were the precursor for Disney’s success at the box office now. However, Universal was the lead studio in the North American cinema market in 2015 with a 21.3% share (whereas Disney was struggling at the time of its acquisitions) with titles like Jurassic World, Furious 7 and Minions. Universal struggled in 2014, just passing 10% market share. So far this year, Universal has an 8.5% market share and no standout titles (these belong to Fox and Disney). The studio production world has been narrowing down for some time now, focusing on fewer but larger, and aiming to produce franchises and tentpole titles.
Unlike other major programmers, NBC Universal hasn’t developed a significant strategy regarding children’s content, beyond the pre-k crowd. The company operates Sprout, which has been very successful in the niche that it operates. It isn’t clear whether NBC Universal will tap DWA to produce children's content for the channel, but it seems likely. The children's TV space is already highly vertically integrated and DWA has already launched linear channels in Asia. It already has a considerable library of children's intellectual property stemming from its acquisition of Classic Media in 2012.  

In fact, supplementing NBC Universal's channels may be in line with a strategic change for DWA, which has aimed to develop new revenues streams alongside its film business. In 2013 DWA attributed 70% of its revenue to movies, while in 2015 that figure had dropped to 57%. Dreamworks has also made the plunge into online content with a highly successful investment in Awesomeness TV, a youth-focused MCN. DWA acquired the company for $33 million in May 2013 and recently sold a 24.5% stake to Verzion for $159 million.

The DWA acquisition fits into a larger strategy for Comcast of growth through acquisition. The deal makes sense in the context of the company’s failed bid to acquire Time Warner Cable. On the other side of the aisle, the DWA acquisition doesn’t carry the same perceived harm to consumers that the consolidation of the US’s number one and number two cable operators would have posed.

The deal is good for both parties; Comcast will bolster its content business while DWA shareholders will receive a significant premium. The deal represents one more step in the continued consolidation of the US media landscape.

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