Why Can’t Jeffrey Katzenberg Find a Buyer for DreamWorks Animation?

After courting and being snubbed by several deep-pocketed investors including a Japanese tech giant, Hollywood’s major studios and now Hasbro, Jeffrey Katzenberg may continue to struggle to find a buyer for his DreamWorks Animation Studios.

With each miss, the executive appears to look more desperate. Those who know him well say it will be tough for Katzenberg to restrain his controlling nature and secure the kind of pact that works for both buyer and seller.

Katzenberg’s desire to lock down an ultra-rich deal for the toon studio he built from the ground up and took public in 2004 is considered one obstacle. But so is his desire to take the top spot at the table of any company that buys his firm.

Analysts have begun voicing concern, saying that DWA’s attempts to sell itself for years with no success is starting to ding the company’s reputation. Not helping is the string of misfires at the box office, which caused DWA to take an $87 million loss on “Rise of the Guardians,” a $13.5 million hit on “Turbo” and $57 million writedown on “Mr. Peabody & Sherman.” “The Penguins of Madagascar” is the next release after “How to Train Your Dragon 2” performed well this year.

Katzenberg, 63, however, sees a bright future for DWA.

He’s ambitiously worked to expand the company into new areas so it will no longer have to rely solely on box office receipts. DWA now has a lucrative TV deal with Netflix; a growing licensing and consumer products, live events and location-based entertainment business; as well as a thriving digital division with AwesomenessTV, a smart buy that gives it access to a rabid teen and tween audience.

But Hasbro didn’t feel it needed any of those assets.

Preliminary merger talks with the toymaker ended Friday, in a deal that was said to be worth a potential $2.3 billion-plus. Despite prospects to create a more powerful player in the family entertainment arena, Hasbro CEO Brian Goldner was clearly turned off by Wall Street’s reaction to the deal.

The day talks first emerged, Hasbro lost $300 million in value. It fell even more the next day, when Hasbro is said to have ended discussions.

A toon studio that’s struggling to launch its next franchise after “How to Train Your Dragon,” in 2010, just wasn’t worth buying — especially for a company that’s not necessarily known for making major acquisitions in the first place. At least not since Goldner took control of Hasbro in 2008.

Analysts did everything they could to dissuade Goldner and Hasbro’s board, as well, with MKM Partners’ Eric Handler, saying the deal “makes no sense to us at all.”

Said Sterne Agee’s Vasilly Karasyvov: “We don’t see a plausible argument for why [Hasbro] would pay 41% of its current market capitalization for a company which, according to its CEO, is facing serious challenges.”

Richard Greenfield and Brandon Ross, analysts at BTIG Research, also noted the mixed success DWA has had of late at the box office: “Unfortunately for DWA, the company’s inconsistent creative output, and thus financial performance, makes it hard to understand why anyone would want to acquire the company at its current market valuation, let alone the $3 billion plus that management supposedly covets.”

Katzenberg’s desire to take a senior role at Hasbro, as part of a merger, panicked Goldner a bit. Katzenberg is known as a micro-manager who is involved in every aspect of his business, and he wasn’t interested in taking a smaller role at a restructured DWA. In fact, some saw Katzenberg as wanting to run Hasbro outright, which likely didn’t mesh with the interests of Goldner, who saw his job in jeopardy.

Sources with knowledge of the talks say Katzenberg isn’t looking to leave DWA behind, but rather is aiming to find opportunities to expand its portfolio of properties beyond the multiplex. That’s especially key in foreign markets like Asia, which led to a potential deal to sell DWA to Japan’s SoftBank, the owner of Sprint and the largest shareholder in China’s Alibaba. But that deal wound up going nowhere in September.

Katzenberg’s overtures to Rupert Murdoch’s 21st Century Fox, whose Century City studio distributes DreamWorks’ movies, didn’t lead anywhere, nor did previous conversations with other media congloms, including Time Warner and Comcast.

DWA’s current film distribution deal lasts through 2017, and would not have been impacted by a sale to Hasbro, according to a person close to the matter.

Of all the deals that Katzenberg has considered, Hasbro perhaps represented the most intriguing opportunity to date.

The toymaker would have supplied DreamWorks with the money the studio needs to grow its TV, digital, live events, location-based entertainment and consumer products businesses, while Hasbro would attain the production and licensing resources it needs to raise the profile of its own brands, and would gain ownership rights to DreamWorks properties like “Shrek,” “How to Train Your Dragon,” “Madagascar” and “Kung Fu Panda.” Where now Hasbro licenses its most popular properties to studios, and relies mainly on revenue from toy sales as the financial reward for such deals, it would have gained a much larger share of the box office, as well as other parts of the entertainment revenue stream.

Wall Street appears to be growing weary of the animation studio’s failed opportunities, including the near miss with SoftBank.

“DWA has had multiple instances of deal talk driving the stock in the past and not materializing, including Softbank recently, and discussions with Viacom and other big studios a few years ago as the Viacom (Paramount Pictures) distribution deal was coming to an end,” said a report by FBR Capital Markets. “This history says that the risk of a deal not materializing with Hasbro now is meaningful.”

Katzenberg is viewed by many as overreaching in all of his potential acquisition talks. He is said to have been asking Hasbro to pay more than $30 a share for DWA.

On Friday, DWA was valued at nearly $2.2 billion. SoftBank is said to have offered $32 a share in a deal worth $3.4 billion. DreamWorks’ board met but dismissed that deal. It could have been tough for the board to decline an offer from Hasbro, though. There were just too many ways DreamWorks could have used Hasbro’s resources, and vice versa, to grow its family businesses across a variety of platforms.

Yet the board never got the chance to vote on a deal. Goldner just didn’t need DWA as much as the studio needed the toymaker.

Goldner already has his own billion-dollar franchises with Transformers, G.I. Joe and My Little Pony, among others, across all entertainment and merchandise platforms. He also has a profitable toy business. A deal with Disney for playthings based on the Mouse House’s characters, superheroes from Marvel and Lucasfilm’s “Star Wars,” generate around 30% of Hasbro’s annual revenue, analysts say.

Along with DreamWorks’ growing brand merchandise program, a merger would have created an $8 billion-a-year consumer products business.

FBR Capital Markets was always doubtful. “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.”

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