D’Works does splits

Animation IPO may signal studio's breakup

This article was updated at 9:16 p.m.

DreamWorks is forging ahead with an initial public offering of its animation unit, a move that offers fresh funds and a higher profile to the studio’s most promising business and provides Paul Allen and other investors with an exit strategy if they want one.

The long-rumored spinoff raises intriguing issues as to the future of the studio that Jeffrey Katzenberg, Steven Spielberg and David Geffen founded a decade ago.

In a filing Wednesday with the Securities and Exchange Commission, DreamWorks said it plans to sell up to $650 million worth of stock in DreamWorks Animation, which will become a publicly traded company seeking the exalted status and lofty trading multiples of rival Pixar.

Katzenberg will be CEO of the new company, which he and Geffen will control though a special class of supervoting stock. Spielberg will not have an operating role in the new company, nor will he own super-voting shares.

The rest of DreamWorks will continue as a private company that will distribute and market its own pics, as well as those of the new animation company.

Former PepsiCo chairman-CEO Roger Enrico has been tapped chairman and head of investor relations, corporate governance and other functions. Ann Daly, who runs DreamWorks Studios’ feature animation, will be chief operating officer. DreamWorks’ general counsel Katherine Kendrick and chief financial officer Kristina Leslie will hold the same titles at the new company. They will sit on its board, along with Katzenberg and Geffen.

More on board

Other directors include Starbucks founder and chairman Howard Schutz; Lewis Coleman, former Banc of America chairman who runs the multibillion-dollar philanthropic Gordon & Betty Moore Foundation; and Nathan Myhrvold, the longtime Microsoft strategist who is CEO of Intellectual Ventures, a private entrepreneurial firm.

“I look at Pixar’s situation and I say, ‘If Pixar and Steve Jobs can be worth $3.8 billion, what can “Shrek” be worth? It’s children’s libraries that are really valuable,’ ” enthused one fund manager, who’s raring to buy the new shares.

“It’s great to have another stock on my screen,” he added.

Others think Pixar is grossly overvalued and say the hype around DreamWorks Animation may make the stock too expensive. “I can’t imagine at what price this thing would have to come out at that I would say it’s a good buy,” said another fund manager. “It feels like it will be more of a vanity play than a great investment.”

While that fund manager professed to be no fan of multiple classes of stock, super-voting shares are common at many media and entertainment companies.

Class conscious

The IPO calls for three classes of stock: A, B and C. The A shares, with one vote each, will be the most commonly traded. Super B shares each have 15 votes. Class C shares are reserved for Paul Allen’s Vulcan Ventures; they are like the A shares, but enable Allen to name one director to the board. DreamWorks’ current owners and investors will receive shares of the new animation divisions, some of which they will sell in the IPO. The shares they don’t sell will be placed in a new holding company. At various intervals over the next few years, Allen or others will be able to sell those shares if they wish.

The provision accommodates the studio’s investors, but, the filing points out, also could create an overhang on the stock price — the potential to drive down the price if the owners sell large blocks at once.

DreamWorks didn’t say how many shares it would sell or give a price range for the IPO.

It said it will inject $175 million of net proceeds from the IPO into the company, and will use the rest to pay down debt it will assume from DreamWorks Studios as part of the separation.

Quiet time

DreamWorks, which can’t discuss the offering due to the traditional SEC-imposed “quiet period,” has been mulling the move for months. But the timing likely is linked in part to the smashing success of “Shrek 2” (pic has already grossed $425 million in domestic box office since its late May release) and in part to the studio’s contractual obligation starting this year to let Allen cash out. The Microsoft co-founder and eclectic investor put $660 million into the studio and pledged up to about $1 billion over the past decade.

Despite the buzz surrounding the IPO, however, history has proven independent film studios and Wall Street do not always mix. Artisan, Orion and Imagine Entertainment are just some examples of failed attempts to go public.

The new company is expected to enter into a consulting agreement with Spielberg and Geffen, according to the SEC filing.

Plenty of speculation

The IPO flurry has revved up water-cooler chatter about the future of DreamWorks’ live-action division, which is coming off a dismal 2003.

This summer has offered some improvement — Spielberg’s “The Terminal” didn’t meet expectations but has pulled in $70 million so far; the Will Ferrell comedy “Anchorman” has racked up $56 million in only its second week; and Tom Cruise starrer “Collateral” opens in August — but the studio’s 2005 slate is looking less meaty.

DreamWorks made its name on movies like “Gladiator,” “Saving Private Ryan” and “American Beauty,” but that level of success has eluded the live-action division lately.

Separate ways?

Some say the animation split portends further readjustments and, ultimately, the splintering of DreamWorks’ three founding partners. With Katzenberg heading the animation domain, Spielberg will be able to focus more on what he does best: producing and directing a smaller slate of live-action movies.

Some foresee the live-action division downsizing to become a more Amblin-sized operation and even going back to Universal, where that Spielberg shingle was formerly housed.

As for Geffen, although he is involved with the Wall Street dealings, he is reportedly building a home in Hawaii and spending more time on personal interests.

Not everyone gives credence to the theory that DreamWorks’ live-action studio will dissolve. “I wouldn’t bet on it,” said one producer who has worked on projects at the studio. “They like being owners and their own bosses. They also like to own their own negatives. I think they’ll keep it as is, make more movies and let animation finance the studio. They don’t think live-action is going to stay slumpy; they think they’ve got stuff this summer and in the pipeline for ’05 and ’06.”

Some may find it ironic that the studio that has always guarded its privacy is now offering up one of its divisions to the public.

On the other hand, the animation unit is only one piece of the pie. DreamWorks’ live-action core — and those who run it — will likely remain cozily removed from the public eye.

The Pixar model

The goal of DreamWorks Animation, based in Glendale, is clearly to position itself as the next Pixar. Unit has shifted its focus to pure computer animation and ramped up to about 1,100 employees. It’s planning to release eight pics, most computer-animated, by the end of 2007. Its next offering, “Shark Tale,” a CGI toon voiced by Will Smith, Robert De Niro and Angelina Jolie, bows Oct. 1.

Yet while DreamWorks found a cash cow in its “Shrek” pics — the first film minted $476 million worldwide, and “Shrek 3” is already in development — other animated films, such as “Sinbad: Legend of the Seven Seas,” have fared less spectacularly. And although “Shark Tale” is studded with stars, auds may have gotten their fill of undersea CGI after last year’s Pixar hit “Finding Nemo.”

The DreamWorks Animation IPO news comes amid reports Wednesday that Pixar is back to renegotiating its deal with Walt Disney after walking away last year when the partners couldn’t agree on terms.

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