Coverage: Comcast in talks to buy DreamWorks Animation for $3 billion

Comcast Corp. is weighing a potential $3 billion acquisition of DreamWorks Animation SKG in what could be an effort to boost its content library.

The Wall Street Journal was the first to report the news.

Ben Fritz, Dana Mattioli and Erich Schwartzel of The Wall Street Journal broke the day’s news:

Comcast Corp. is in talks to buy DreamWorks Animation SKG Inc. for more than $3 billion, according to people familiar with the matter, in a deal that could make the cable giant a rival to Walt Disney Co. in the lucrative family-entertainment business.

Comcast’s Universal Pictures studio has enjoyed success in recent years with its animated “Despicable Me” and “Minions” movies but is still a relatively small player.

But its parent company has been moving aggressively to mimic Disney by using its animation properties to build out its consumer products and theme parks businesses, a strategy that could be accelerated by the addition of DreamWorks, which makes the “Shrek,” “Kung Fu Panda,” and “Madagascar” movies, among others.

As with all such talks, a deal may not be reached. The tentative purchase price represents a healthy premium over DreamWorks’ current $2.3 billion market value.

Comcast is set to report its financial results on Wednesday.

It wasn’t immediately clear what the deal would mean for DreamWorks’ chief executive, the veteran Hollywood mogulJeffrey Katzenberg. One person with knowledge of the talks said that DreamWorks and Illumination Entertainment, Universal’s animation studio, would remain separate brands.

Mr. Katzenberg would receive a total payout of about $21.9 million if the company is sold and he leaves DreamWorks, according to the company’s most recent proxy statement. Additionally, he controls about 60% of the company’s common voting stock, according to the proxy.

He has been seeking a buyer for his studio, one of the last in Hollywood not part of a larger conglomerate, for several years.

Anousha Sakoui of Bloomberg detailed what this deal could mean for Comcast:

Buying the maker of the “Shrek” and “Kung Fu Panda” movies would bolster Comcast’s collection of animated films as the largest U.S. cable provider searches for ways to grow amid a trend of cord-cutters dropping traditional TV for online video services like Netflix. Such a move may also illustrate how Hollywood is heating up in terms of deal activity, with Viacom Inc. saying it’s looking to sell part of Paramount Pictures.

“Content owners have become increasingly valuable as of late and we could argue Comcast sees potential value in the library of franchises, characters that could be integrated,” said Eric Wold a B. Riley & Co. analyst covering the entertainment industry.

DreamWorks Animation spokesman Dan Berger declined to comment. Comcast representatives weren’t immediately available for comment.

The report revives merger speculation surrounding DreamWorks Animation since 2014, which included approaches from Hasbro Inc. and Japan’s SoftBank Group Corp. After a series of film write-offs, Katzenberg in early 2015 implemented a wide ranging restructuring that involved cutting 18 percent of its workforce and selling its Glendale, California-based campus after costs swelled.

The studio also committed to reducing its film costs and the number of films it made a year to two. Katzenberg himself said he would refocus on making his features profitable. There have been some bright spots, with the studio seeing some success with “Home,” its only feature last year. and its growing TV business.

Comcast’s Universal Pictures comes off its best year ever in movies but will faces the challenge of keeping up with Walt Disney Co. — owner of LucasFilm, Marvel and Pixar — which will produce an estimated record number of billion-dollar movies in 2016. Comcast’s NBCUniversal business — which includes TV, films and theme parks — generated about 38 percent of total revenue and 30.5 percent of operating income last year.

Ryan Faughnder of the Los Angeles Times explained how DreamWorks recently attempted to merge with both SoftBank and toy maker Hasbro, with both deals failing:

The talks may not result in a deal. Indeed, previous efforts to sell DreamWorks Animation fizzled when Japan’s SoftBank ended talks to buy the Glendale studio. Toy maker Hasbro also expressed interest in buying DreamWorks but those talks also collapsed over a year ago. There was also speculation that 21st Century Fox would buy the company.

“We would prefer to see how this plays out,” said Eric Wold, an analyst with B. Riley. “There were at least three reportedly interested buyers of DreamWorks Animation back in 2014 that never developed.”

DreamWorks Animation once dominated the animation industry but has struggled in recent years to replicate the success of its earlier blockbusters such as “Shrek” while facing growing competition from rivals such as Disney and Universal’s own Illumination studio.

That was underscored last year when a series of box office duds prompted the company to cut 500 jobs, close its studio in Northern California and overhaul management. Merging with a media conglomerate like Comcast would give it more of a financial cushion to withstand the uncertainties of the fiercely competitive animation business.

Katzenberg vowed to refocus his efforts on rebuilding the studio’s core animation business and diversifying operations by aggressively expanding TV operations. DreamWorks has a programming deal with Netflix and could benefit from NBCUniversal’s TV properties.