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Why DreamWorks Might Want a Takeover Offer (But Likely Won’t Get One)

Updated from 6/30 to include updated DreamWorks comments in 6th paragraph.

NEW YORK (TheStreet) -- As media conglomerates pair up (or at least attempt to), DreamWorks Animation (DWA - Get Report) is one of the few independents to be left on its lonesome to tackle waning interest in blockbuster films, animated or otherwise.

On the surface, DreamWorks appears to be an attractive takeover target. Its annual revenue hover around $707 million and it has a string of successful franchises including Shrek and The Croods that are likely to continue racking up sales through consumer products, licensing and home entertainment.

But after two quarters of losses far wider than expected, the family animation studio is now trading at its cheapest level ever. In its most recent second quarter, DreamWorks reported a net loss of 18 cents a share compared to losses of 2 cents a share expected by analysts, leading shares to crater more than 11% over Wednesday's session. Year to date, the stock has lost more than a third of its value, cratering 43.7% to $19.98 compared to the S&P 500's 6.6% gain.

Courting a deal would surely benefit DreamWorks. "As an independent studio, there could be more synergies as part of a larger media company, both on the production and distribution side," argued S&P Capital IQ's Tuna Amobi, who retained a "buy" rating, in a phone interview.

But, DreamWorks' intrinsic value is countered by a lack of demand. Television properties and merchandising opportunities aside, the company's performance is still primarily tied to how its films fare at the box office.

DreamWorks' head of public relations, Allison Rawlings, declined to comment on whether the company would be open to M&A activity. 

Weakness at the box office has plagued DreamWorks over the past several quarters. A quarter earlier, the Glendale, Calif.-based studio reported a net loss of 51 cents a share, more than three times wider than the analyst consensus, due to a $57 million impairment charge on its March release of Mr. Peabody & Sherman.

Its summer 2013 film Turbo also saw disappointing results domestically, generating only $83 million in U.S. and Canadian markets. The company took a $13.5 million write-down in February for that movie, the accounting for which is currently under SEC investigation.

If industry talk is to be believed, DreamWorks has flirted with the idea of a takeover before. "Although it was kept very quiet at the time, we're certain that CEO Jeffrey Katzenberg put the company up for sale two years ago and there were no buyers," Topeka Capital Markets' David Miller (who maintained a "hold" rating and $23 price target) told TheStreet.

Cowen & Company's Doug Creutz added he heard rumors as early as 2010, recalling, "They couldn't find any buyers back then and that was when their economics of their film business looked a lot better than they did now."

Therein lies the problem for DreamWorks. Though it has had several successful franchises in a relatively short history, albeit without the level of consistency Pixar has enjoyed, there isn't a market for movie studios at the moment. 

All the major media conglomerates already have an animation arm or have cash tied up elsewhere, Miller noted: Comcast (CMCSA) has Illumination Entertainment which has succeeded with its Despicable Me franchise, Warner Bros. (TWX) recently knocked it out of the park with The Lego Movie, 21st Century Fox (FOXA) owns Blue Sky Studios, producer of Rio and Ice Age, and Walt Disney Co. (DIS) animation is a force in animation which doesn't need fortifying.

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