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How Jeffrey Katzenberg Finally Made DreamWorks Animation a Sexy Buy

How Jeffrey Katzenberg Finally Made DreamWorks Animation a Sexy Buy

In the entertainment industry, you must keep moving forward like a shark to survive. And no one knows that better than Jeffrey Katzenberg, who finally landed a buyer for his DreamWorks Animation in Philadelphia-based Comcast — aka the owner of Universal Pictures and animation house Illumination Studios. The media conglomerate has closed a deal buy his Glendale-based animation studio for $3.8 billion, far more than its current market value of $2.35 billion. Katzenberg controls 60.7% of DreamWorks’ voting shares.

Illumination is the jewel in Universal’s annual release slate, reliably turning out “Despicable Me” spin-offs and Dr. Seuss adaptations. Run by former Fox exec Chris Meledandri, Illumination can take full advantage of the DreamWorks library of brands and potential franchises.

The DreamWorks story is one of high-flown dreams and expectations, and a much smaller, more prosaic reality.

After Disney chief Michael Eisner exiled him from the Magic Kingdom, in 1994 Katzenberg convinced Steven Spielberg and David Geffen to found a new studio, DreamWorks SKG. Katzenberg considered himself to be the creative driver behind DreamWorks animation. He started haltingly with the underwhelming trifecta “Antz,” “Prince of Egypt,” and “El Dorado,” which hardly put DreamWorks in competition with Disney.

But then came “Shrek,” a fractious production that ran through multiple writers and directors until first-time Kiwi director Andrew Adamson, a PDI special-effects director, took the reins. As chronicled in Nicole Laporte’s book “DreamWorks, The Men Who Would Be King,” Adamson refused to be intimidated by Katzenberg, and persuaded him that the film should have an irreverent voice that included sexual jokes and Guns ‘n Roses on the soundtrack. “Shrek” finally grossed $484 million worldwide and launched a series of hugely lucrative sequels, enabling DreamWorks Animation to eventually go public.
Unfortunately, DreamWorks Animation’s fortunes rose and fell with each release. Without a large media company behind him, Katzenberg sweated bullets over each opening weekend. Various iterations of “Kung Fu Panda,” “Madagascar” and “Shrek” did well — for a while. The company stock took a 12% hit the Monday after well-reviewed “How to Train Your Dragon 2” opened to $50 million domestic. (That’s a robust number.) It went on to deliver a worldwide total of $616 million in 2014—more than the original’s mighty $495 million global take. When “Mr. Peabody” disappointed overseas, the company took a $57 million writedown. “Rise of the Guardians” marked another one. Last year, after box-office flops “Turbo” and “Penguins of Madagascar,” the company cut 500 jobs and shuttered its Northern California studio, bringing in animation star producer Bonnie Arnold to run the ship. Luckily, last year “Home” scored $386 million worldwide.
Under pressure to diversify in order to improve DreamWorks Animation’s financial performance, Katzenberg expanded its horizons. In 2012, DreamWorks acquired Classic Media, now retitled DreamWorks Classic, including characters such as Casper the Friendly Ghost, Lassie, and Waldo. DreamWorks acquired a controlling stake in AwesomenessTV in advance of launching its own family-oriented YouTube Channel, DreamWorksTV. DreamWorks also acquired iconic Felix the Cat. And DreamWorks contracted to produce 1,100 episodes of original cartoon programming for Netflix.

This TV-bolstered strategy made DreamWorks Animation a far more attractive property for a studio like Universal, which is not only in the animation business via Illumination but could also use new characters for its theme parks and consumer product pipelines. Katzenberg has also developed a strong presence in China with Beijing-based DreamWorks Oriental. In 2015, China co-production “Kung Fu Panda 3″ grossed $504 million worldwide, with some 70% of the total from international markets.

Katzenberg had been down this road before, only to see other deals fizzle with the likes of Paramount Pictures, Japan’s SoftBank, Hasbro and 21st Century Fox. In 2014, he was demanding $35 a share when he didn’t have a string of recent hits behind him. Clearly, this time Universal was better positioned to fully exploit what DreamWorks Animation had to offer—including an upcoming likely hit, “Trolls” (November 4, 2016).

DreamWorks shares shot up dramatically on Wednesday after the news of the potential deal broke Tuesday night. The studio has been on the uptick, boasting its best numbers in a decade: DreamWorks reported earnings of $42.1 million (48 cents a share) in its most recent quarterly report vs. last year’s fourth quarter loss of $54.8 million (64 cents). Revenue rose to $319 million, up 36% from 2014.

Now Universal is home to all parts of DreamWorks again, as what’s left of Spielberg’s DreamWorks live-action empire is already there. And Katzenberg will be set free, like Geffen, a billionaire at last. But the old high-flying dream of a DreamWorks studio is long gone.

For a peek at upcoming work from Dreamworks Animation, check out the “Trolls” teaser trailer:

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