If Comcast Deal Happens, How Would DWA and Illumination Co-Exist?

Jeffrey Katzenberg Dreamworks Comcast
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Ever since an October car accident shattered his right arm and wrist, Jeffrey Katzenberg has been methodically gripping and releasing his hand. During meetings, at meals, during any stray down time, he works the wounded wing.

The DreamWorks Animation CEO has been told by physical therapists that it could take more than a year to regain full mobility. But he continues to flex the hand obsessively, determined to prove the medical community wrong and beat expectations, again.

Katzenberg has brought that trademark tenacity and single-mindedness to the table in recent years, as he looked for a company willing to pay a premium price for his animation studio, which has been struggling to gain solid footing as a stand-alone theatrical studio, with a growing television production unit.

His persistence appears to be on the verge paying off, with Comcast reportedly offering more than $3 billion to acquire DWA, a significant premium over the company’s $2.35 billion market value, before the deal surfaced. The price reportedly approximates the $35-per-share mark that Katzenberg has said he believes his company is worth, according to one banker who is familiar with DreamWorks.

A deal has yet to be struck, and may never happen if the parties fail to come to terms. Some observers note with caution that other potential DreamWorks buyers –SoftBank and Hasbro–backed away at the 11th hour.

If Comcast consummates a deal, speculation is that 65-year old Katzenberg will cash out and step down, a person close to Katzenberg concurred, confirming an report Wednesday by the Wall Street Journal. The person said that, after a brief transition period, the DWA chief would likely leave the company that he helped create.

One thing is certain, Katzenberg will not retire. “I’ve never seen a bigger workaholic,” said the source. Said another person who knows him well: “No matter what scenario you can dream up, ‘retirement’ is not a word that will be involved.”

Much of the speculation following news of a possible buyout centers on how DWA would co-exist at Universal Pictures with Illumination Studios, the successful animation shop led by Chris Meledandri, which has become a major force with the “Despicable Me” hits and the spinoff, “Minions.”

One plausible scenario is that Meledandri would be given additional oversight of DWA, much like Pixar Animation’s John Lasseter and Ed Catmull took the creative reins of struggling Disney Animation after the entertainment conglomerate acquired Pixar. As a result, both Disney Animation and Pixar have both been pumping out hugely successful feature cartoon.

“Clearly, a lot of companies are investing billions of dollars to expand their animation capabilities. And it’s clear from experience there can be more than one label inside a company,” said one insider supporting the deal, who declined to be named.

Skeptics worry that DWA and Illumination could face problems co-existing because of their vastly different cultures and business strategies. DWA’s films routinely cost north of $100 million, while “Despicable Me” was made for less than $70 million. A case could be made that those movies and their spin-offs and upcoming Meledandri projects such as “The Secret Life of Pets” seem more attuned to the zeitgeist than DreamWorks’s productions — and they enjoy more capacious profit margins.

“Illumination is able to create content at a fraction of the cost of DreamWorks Animation and far more profitably,” said Rich Greenfield, an analyst with BTIG. “It’s weird to buy a company that has struggled.”

Greenfield notes that there are other difficulties. Verizon has a 24% stake in AwesomenessTV and a multi-year deal for more than 200 hours of original content to be delivered to its subscribers. DreamWorks Animation also is one of the major suppliers of programming to Netflix. Both companies are competitors to Comcast, which makes a large part of its profits in the cable business.

“I find this highly questionable,” said Greenfield. “I’ve no doubt that Comcast has Disney envy — they tried to acquire Disney at one point — it’s just that [DreamWorks Animation], given its structural relationships, does seem an odd fit.”

It is difficult to imagine Katzenberg remaining at DWA after the acquisition. It would thrust the risk-taking studio builder, accustomed to being his own boss, back into the kind of corporate milieu that he was forced to flee more than two decades ago, when Disney CEO Michael Eisner refused to promote him into the company’s vacant presidency.

Katzenberg then threw in with David Geffen and Steven Spielberg to form DreamWorks SKG — billed as the first full-fledged studio to launch in Hollywood in decades. When that venture came apart, Katzenberg again succeeded in remaining his own master, by taking the helm of the publicly spun-off animation unit.

At DreamWorks Animation, he correctly predicted the rise of 3D, pushing to make all of the company’s films in the format even before “Avatar” became a planet-rattling blockbuster. He was one of the first to make inroads to China, establishing the joint venture Oriental DreamWorks and pitching “Kung Fu Panda” to Asian audiences. And he augmented DreamWorks Animation’s key film unit with shrewd acquisitions such as Classic Media, the creator of Casper the Friendly Ghost, and AwesomenessTV, the YouTube giant that provides a link to millennials.

Media analyst Hal Vogel suggested that Katzenberg is now accustomed to setting his own agenda. Said Vogel: “He has a strong entrepreneurial spirit.”