The prospect of an acquisition has sent shares in the animation studio behind “Kung Fu Panda” and “Shrek” soaring to a 52-week high. Shares of DreamWorks were trading at $31.93, up nearly 18%. Comcast’s stock was also up, trading at $62.01, up 1.53%, but that was partly attributable to the cable and media conglomerate’s robust first quarter earnings report.
The deal could help Comcast strengthen the volume of family-friendly content coming from NBCUniversal, making it a more formidable competitor with Disney.
“It makes strategic sense,” said Tuna Amobi, an analyst with S&P Capital IQ. “Comcast is trying to be well diversified and content is where there are still gaps they can feel. Animation is one area where they have under-performed some peers.”
This is not the first time that DreamWorks Animation has been the source of acquisition speculation. 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.
“Here we go again, yet again,” said David Miller, managing director with Topeka Capital Markets in Los Angeles. “It feels real. The markets think it’s real, but these things are tough to predict.”
There are other potential obstacles to consummation. Universal, Comcast’s film unit, owns Illumination Entertainment, the producer of “Despicable Me” and this summer’s “The Secret Life of Pets.” Bringing DreamWorks Animation on board could put the animation studios in competition for release dates for their films. But analysts note that DreamWorks Animation has its own output agreement with 20th Century Fox that continues through 2017.
But for DreamWorks Animation, which has struggled to compete with larger studios such as Warner Bros. and Disney, that are small parts of sprawling media empires, being publicly traded has been an ordeal, at times. The company’s stock can rise or fall with every film it releases, leading to volatility. Being part of a bigger conglomerate could shield the studio from being overly dependent on box office results. Comcast has a market cap of $148.8 billion compared to DreamWorks Animation’s $2.74 billion market cap.
There are reasons DreamWorks Animation is an attractive commodity. The studio has deepened its television holdings, signing deals to produce shows for the likes of Netflix. Its 2013 purchase of AwesomenessTV, the multi-channel company with links to the YouTube generation, is also appealing. It would enable Comcast to forge bonds with millennial viewers, the same group it has tried to reach through investments in companies such as Buzzfeed and Vox. At some point, a union would enable Comcast to plug Shrek, Po, and other lovable characters from the DreamWorks Animation cannon across the company’s other assets.
“Comcast has so much scale relative to DreamWorks and that allows them to leverage their library of content and franchises across their theme parks and consumer products divisions,” said Amy Yong, an analyst at Macquarie.
One beneficiary of a deal for DreamWorks Animation might be Lionsgate. The studio behind “Hunger Games” has found itself the subject of intense merger and acquisition chatter, but with DreamWorks Animation off the table, the options for conglomerates looking to plant a flag in Hollywood suddenly narrow. A lack of supply could spur demand.
“It’s the last remaining pure studio play in existence,” said Miller. “If the DreamWorks Animation deal is true than Lionsgate becomes even more of a scarce asset.”
Lionsgate shares spiked more than 6% in early trading on Wednesday.