With the purchase of Dreamworks Animation ( (DWA) ) and the Shrek, Madagascar, Kung Fu Panda, How to Train Your Dragon movie franchises, Comcast ( (CMCSA - Get Report) ) CEO Brian Roberts is taking a page from the Walt Disney Co. ( (DIS - Get Report) ) playbook. DreamWorks brings with it a host of kid-friendly characters that Comcast can plug into merchandising channels and develop into new theme park exhibits.
The buyout comes at a pivotal time for film studios and distribution companies, and has implications beyond Comcast's portfolio. The parent of NBCUniversal is paying a hefty valuation on studios as Viacom's ( (VIAB - Get Report) ) Paramount and Lions Gate Entertainment ( (LGF) ) are looking for deal partners. In buying Dreamworks, Comcast is taking on relationships with Netflix ( (NFLX - Get Report) ) and Verizon ( (VZ - Get Report) ). The overlapping strategic relationships highlight the aggressive, complex scrum taking place over premium video content.
Comcast is paying $41 per share for DreamWorks, putting a $3.8 billion equity value on the company. UBS values the deal at 24 times DreamWorks' projected 2017 Ebitda, while the bank values NBCUniversal at a comparably paltry 9 times.
Shares of DreamWorks surged $7.76, or 24%, to $39.96 on Thursday afternoon.
Lions Gate, which has expressed interest in a combination with Starz ( (STRZA) ) and has backing from John Malone, gained $1.74, or 8.4%, to $22.47.
Paramount-parent Viacom, which reported lackluster earnings on Thursday, dropped 41.45, or 3.3%, to $42.33.
Stifel, Nicolaus & Co. analyst Ben Mogil suggested that comparisons between Paramount and DreamWorks are a stretch.
"In many respects, Paramount is where DreamWorks Animation was a few years ago, albeit with a deep library," he wrote, "a company which was in movie production alone and that segment itself is relatively troubled." Paramount has struggled financially, and its appeal would reside more in its distribution networks than its current cash flow.
Rich Greenfield of BTIG suggested in a Thursday note that that Comcast is overpaying. "While Brian Roberts has long had 'mouse envy,' buying DWA will not transform NBC Universal into Disney," he wrote, suggesting that the price tag reflects "a lack of financial discipline."
Comcast will be stepping into some relationships that Dreamworks already has in place.
The studio generated a third of its 2015 revenues through licensing deals with Netflix, according to Securities and Exchange Commission filings, and recently extended its distribution deal with the online streaming company. Comcast has experimented with its own online video projects. "Even if Dreamworks is able to exit its Netflix deal early or create additional product above and beyond the Netflix deal that could flow to Comcast," Greenfield wrote, "the quality of the television content has not been compelling to-date."
Just weeks ago, DreamWorks sold Verizon a 24.5% stake in AwesomenessTV, a fast-growing business that produces video for YouTube networks and other platforms. "The word 'awkward' comes to mind," Greenfield wrote about Comcast and Verizon each holding stakes in the company.
The cable networks and the online video streaming companies have an ongoing need to feed their binging viewership with new content. Creating the next Walking Dead or Hunger Games franchise, quarter after quarter, is a daunting task.
"Given that creative talent is not infinitely scalable; such a state of the world is likely to result in more value accruing to the studios, especially those with established franchises and an ecosystem of talent," Barclays Capital analyst Kannan Venkateshwar wrote in a recent report on the video market.
As the valuation that Comcast is paying for DreamWorks reflects, the price tags for studios is clearly accruing.