DreamWorks Animation Sale to Hasbro Hinges on Control, Price

Can the heads of Hasbro and DreamWorks Animation find a way to play nice together?

Both Hasbro chief Brian Goldner and DWA founder Jeffery Katzenberg are tough negotiators, and willful individuals who are used to running their own shows. So one of the open questions about a potential merger of their companies is whether the two CEOs can come to terms on operational control of the new entity. It’s impossible to imagine Katzenberg reporting to Goldner (or vice versa), even though Hasbro would be acquiring DWA.

Of course, the other big question is whether the executives can agree on a price.

Katzenberg is naturally looking to get the best deal for DWA, and is said to be asking Hasbro to pay more than $30 a share for the company in a deal that could be worth at least $2.3 billion. (Japan’s SoftBank is said to have recently offered $32 a share, or $3.4 billion, for DWA in September).

DWA’s stock closed at $22.37 on Wednesday, on the day its discussions with Hasbro were first revealed. At the time, DWA was valued at $1.9 billion, while Hasbro’s net worth is $7.2 billion. On Thursday, DWA stock shot up 14% to close at $3.15, while Hasbro fell 4% to end at $54.98.

The high cost of acquiring DWA — and Katzenberg’s desire to remain in control — is what eventually sunk previous negotiations with potential buyers. Similar deal points could prove a sticking point this time around, too.

“Katzenberg, we believe, has a constructive view of DWA’s value, which can make it hard for the seller and buyer to agree on pricing,” FBR Capital Markets said Thursday in a report analyzing a potential deal.

In his talks with Goldner, Katzenberg is dealing with an executive who has had his sights set on Hollywood ever since taking over as CEO of Hasbro in 2008.

Goldner was instrumental in reviving the toymaker’s top brands — including Transformers and G.I. Joe — through films and TV shows. Now he sees DWA as a way to buy a toon studio through which he can make feature-length movies starring Hasbro’s characters (it recently announced a “My Little Pony” film), but also add more popular brands to the toymaker’s portfolio; lucrative distribution deals with Netflix and teen and tween-targeted entertainment network AwesomenessTV; as well as a theme park presence in growing markets like China and Russia. DWA also is now producing original features in China through its 49% stake in Oriental DreamWorks.

Historically, Hasbro hasn’t been keen on using acquisitions as a way to grow its bottomline. Instead, the company has focused on expanding into new overseas markets like China, Russia, Korea, Colombia and Brazil as a cornerstone of growth.

Film and television, however, is another key growth strategy.

Goldner, 51, is a fiercely competitive executive who has recently moved pieces around the board to expand Hasbro’s efforts on all screens, recently promoting Stephen Davis from Hasbro Studios president to chief content officer.

He also announced Allspark Pictures as a new film label within Hasbro Studios to take more creative and financial control over how its brands play out on the big and small screens. The first projects to be produced through the shingle include a live action “Jem and the Holograms” movie, produced with Jason Blum, and the “Pony” pic. “Transformers” and “G.I. Joe” are set up at Paramount, while “Candy Land” is at Sony. Fox has “Magic: The Gathering.” Universal recently released “Ouija,” a $5 million budgeted thriller that’s earned $58 million since Oct. 24.

He’s a regular in Hollywood, meeting with partners that include Disney and Electronic Arts, distribution partners like Paramount and Universal, but also showing up at each of his films’ premieres, flying in from Hasbro’s headquarters in Pawtucket, Rhode Island. He has strong ties to filmmakers including Steven Spielberg and Lorenzo di Bonaventura. Hasbro also produces the toys for Marvel’s superhero films, Lucasfilm’s “Star Wars” films, Paramount’s “Star Trek,” and Rovio’s “Angry Birds.” It recently took Disney’s Princesses away from rival Mattel in a new deal that starts in 2016, as part of a deal that also lets it create toys tied to “Frozen.”

Buying DWA would give Hasbro control of characters from films like “Shrek,” “The Penguins of Madagascar” and “How to Train Your Dragon,” but also Classic Media’s massive portfolio of 450 brands, including Richie Rich, Dick Tracy, Fat Albert, Archie, Felix the Cat, George of the Jungle, Frosty the Snowman, Underdog and Where’s Waldo, that DWA acquired in 2012.

Hasbro has stepped back a bit from The Hub, the kids cable channel it launched with Discovery Communications — the channel is now branded Discovery Family and Hasbro’s stake has been reduced to 40%. But Hasbro continues to air series on the channel, while exploring other outlets for shows, recently setting up “Transformers: Robots in Disguise” at Cartoon Network, in part because of its young male viewership.

A takeover of DreamWorks would enable Hasbro to supply shows through the toon studio’s deal with Netflix to provide 300 hours of kids programming to the streaming service.

But Hasbro also has been looking to grow its digital presence through games and online platforms. DWA happens to own one of the more popular online entertainment destinations with AwesomenessTV, which has over 100 million subscribers — mostly made up of teens and tweens that are hard to reach through traditional TV platforms. In a separate deal, DWA is looking to sell a stake in AwesomenessTV to Hearst Publishing for more than $80 million, which would provide the company with a strong foothold in the publishing biz — another potential carrot for Hasbro to close a deal.

“Jem and the Holograms” was revived from Hasbro’s vault and inspired by the social media driven lives of girls today, Goldner has said. Universal, which is co-financing the film, will distribute it in 2015.

All of DWA assets would fall in line with Goldner’s goal to further Hasbro’s all-screen content strategy. “We’re building our storytelling and omni screen capabilities globally, reaching kids and families everywhere they’re consuming content,” he said late last month while discussing Hasbro’s third quarter results in a call with Wall Street analysts. “Hasbro will continue to develop new programming in addition to our already rich programming library for Discovery Family and for networks and screens globally as we continue to build brands through storytelling.”

Since many of Hasbro’s TV shows are animated — it’s produced 1,250 half hours of kids programming — “Hasbro has developed tremendous expertise in producing animation,” Goldner said. “We are working with the world’s best studios and we know how to produce top quality animation cost effectively. As our content strategy and all screen strategy evolve, we’re building upon our experience in animation and storytelling.”

DWA could help further Hasbro’s animation efforts. But producing animation at a budget that’s lower than what DreamWorks is used to could be a sticking point.

“We see that movies can be produced very economically,” Goldner said, due to changes in technology.

DWA is under pressure to lower its production and marketing costs per film and Katzenberg has been open about reducing what it spends. The studio cut 350 employees from its payroll last year after it having to take writedowns on the poor performance of its films. It took an $87 million loss on “Rise of the Guardians,” a $13.5 million hit on “Turbo” and $57 million writedown on “Mr. Peabody & Sherman.”

“Three of our last four films have not delivered in terms of audience turnout or financial performance,” Katzenberg told analysts in April.

Since then, Katzenberg has discussed sales to SoftBank after talks with 21st Century Fox, which distributes its films, didn’t go anywhere.

As a way to offset any losses from the film studio, Katzenberg has been aggressive in expanding into TV, digital platforms, consumer products and location-based entertainment opportunities to expand teh profile of the company’s characters.

That has helped make the company more attractive to potential partners, but has done little to boost DWA’s stock price. It’s lost 49% of its value over since its high in 2010.

Analysts so far see a fit in corporate strategies in a Hasbro-DreamWorks merger.

“We see potential compelling synergies across film/TV content, consumer products, digital and location-based initiatives, for a combination that would seem consistent with Hasbro’s increasing focus on incubating, developing and monetizing film franchises across its core toys businesses,” said Tuna Amobi, at S&P Capital IQ.

Meanwhile, “Hasbro today has enjoyed mega success with its ‘Transformers’ property in four live action films,” said Paul Kurnit, a clinical professor of marketing at Pace University’s Lubin School of Business. He’s also a former president of ad agency Griffin Bacal, whose client roster included Hasbro. “The Hasbro library could potentially profit enormously by new animated imaginations of many of their properties for the large screen and for video release. DreamWorks could be just the magical collaboration to make those dreams come true.”

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