NBCUniversal Acquires DreamWorks Animation for $3.8 Billion

NBCUniversal has set a deal to buy DreamWorks Animation for $3.8 billion in cash, giving the Comcast-owned media conglomerate added heft in its effort to compete with rivals like Disney, Time Warner and Viacom, all of which cater more directly to kid-and family audiences.

The deal values DreamWorks Animation at $41 a share, a rich premium over the company’s recent trading levels. The total equity value of the deal, including debt, is $4.1 billion. Shares in the smaller company surged nearly 25% in earlier trading after the announcement was made.

DreamWorks Animation will become part of NBCUniversal’s Universal Filmed Entertainment Group. Chris Meledandri, head of Universal’s Illumination Entertainment animation wing, will oversee operations. The DreamWorks Animation brand will remain intact as an imprint.

After the sale closes, DreamWorks Animation CEO Jeffrey Katzenberg will become chairman of DreamWorks Animation New Media, comprising its ownership stakes in AwesomenessTV and Nova, which will be part of NBCUniversal although it’s unclear where the unit will be housed within the company. Katzenberg will also serve as a consultant to NBCUniversal. Though he remains committed to his work with Comcast, those close to Katzenberg expect he will remain active in his own business endeavors independent of that cable giant.

DreamWorks will help us grow our film, television, theme parks and consumer products businesses for years to come,” said NBCUniversal CEO Steve Burke. ” We are fortunate to have Illumination founder Chris Meledandri to help guide the growth of the DreamWorks Animation business in the future.”

The deal is expected to close by the end of the year. There is a $200 million breakup fee if the pact falls apart and does not receive regulatory approval, according to public filings. DreamWorks Animation marks the latest investment in a major entertainment content engine by NBCUniversal parent Comcast, the cable giant that took over the Peacock from GE in 2011.

“This agreement not only delivers significant value for our shareholders, but also supports NBCUniversal’s growing family entertainment business,” Katzenberg said. “As for my role, I am incredibly excited to continue exploring the potential of AwesomenessTV, NOVA and other new media opportunities, and can’t wait to get started.”

The deal marks a significant up-charge over DreamWorks Animation’s $2.79 billion market cap and allows the studio behind “Shrek” and “Kung Fu Panda” to become part of a sprawling media conglomerate. It struggled in recent years to operate as a publicly traded, pure play studio, with its stock given to rise and, more often, fall following every film release. Rivals, such as Disney and Warner Bros., are all parts of heavily diversified media conglomerates that enable them to be less dependent on box office results.

“It’s gotten difficult to be an independent studio,” Tuna Amobi, an analyst with S&P Capital IQ, told Variety shortly after reports broke that talks were taking place between the companies. “Wall Street doesn’t like the uncertainty. This allows DreamWorks to be part of a larger company. The access to the huge resources helps it given the importance of scale today.”

Katzenberg had been trying to sell the company for years. Toy company Hasbro had been in talks to acquire the studio in a deal worth at least $2.3 billion, but talks collapsed in November 2014. Japanese conglomerate Softbank also kicked the animation company’s tires in September 2014, but no deal materialized.

He has also worked to broaden DreamWorks Animation’s offerings, snapping up AwesomenessTV, which is a major force in digital video, and Classic Media, the makers of “Casper the Friendly Ghost” and “Lassie.”

The acquisition bolsters NBCUniversal’s family entertainment offerings, potentially allowing them to plug in DreamWorks Animation’s cartoon characters across Comcast’s array of theme park, children’s television programming and merchandising holdings. Combined with Illumination’s output, the studio could release as many as four major animated films annually, challenging Walt Disney Studios in the animation space. Fully integrating the studios may take a few years. DreamWorks Animation has a distribution pact with 20th Century Fox the runs through 2017.

In terms of other high-profile acquisitions, the DreamWorks Animation deal is slightly more than the $4 billion Disney paid for LucasFilm in 2012 and the $3.96 billion it shelled out for Marvel in 2009, though it trails the $7.6 billion that Disney paid for Pixar in 2006.

In filings, Comcast said that the deal will not impact its plans to repurchase $5 billion worth of common shares this year.

Lionsgate and Viacom could be among the major Hollywood studios benefiting from Comcast-owned NBCUniversal’s $3.8 billion takeover of DreamWorks Animation.

The deal announced Thursday stoked speculation that mergers and acquisitions will continue to heat up for the rest of the year. There's already been eight other deals struck this year worth about $8.4 billion vs. about $9.3 billion in 2015.

And Wall Street is placing bets.

Shares of Lionsgate, long considered a takeover target, popped more than 7 percent after the DreamWorks deal was unveiled. Viacom, which is currently selling a minority stake in its Paramount Pictures unit, saw its stock jump nearly 9 percent.

"Comcast's agreement to buy DreamWorks Animation provides an encouraging valuation mark for Viacom and Lionsgate,” wrote FBR analyst Barton Crockett in an investors note.

Lionsgate, which has a Canadian tax domicile, has confirmed on-again, off-again negotiations with Starz. Liberty Media chairman John Malone, who has a big stake in Starz, has eyed a cross-border deal to avoid the U.S. tax net.

And, there has also been speculation that a wealthy Chinese investor might want to own some or all of Lionsgate. There has already been similar deals this year, including Dalian Wanda Group's $3.5 billion takeover of film and TV production company Legendary Entertainment.

Lionsgate is one of the few standalone independent studios left in the ecosystem and M&A tends to spark more M&A," says Macquarie Securities analyst Amy Yong.

Meanwhile, Viacom CEO was already touting the DreamWorks deal as a harbinger of good news for his own company.

"I think it shows the value," says Dauman, who was speaking at the end of the company's earnings call when an analyst asked about the breaking DWA deal news. "Here you have DreamWorks Animation, a studio that puts out two movies a year."

FBR analyst Crockett in his report compared Paramount favorably to DWA. "We, in our sum of the parts [valuation of Viacom], carry the Paramount studio at a value of just over $4 billion. But this studio has a $31 billion domestic box office film library that is over 6 times the size of DWA's library and nearly 4 times the size of Lionsgate’s library.”

Crockett added DWA releases two to three movies a year, while Lionsgate releases more than 15 a year and Paramount over 10. He concluded: “This all suggests that the DWA deal provides support for Lionsgate’s valuation and argues for a very positive bias to the valuation that will be placed on Paramount in the sale of a minority stake expected to wrap up in June.”

Drexel Hamilton analyst Tony Wible also wrote in a report that the DreamWorks deal will help Viacom sell its Paramount stake at a higher valuation.

He explained: “This may allow Viacom to secure a larger premium valuation - especially as both studios are undergoing difficult transitions.”