DreamWorks' Acquisition Shows Huge Future Potential

By Tom Gibbs - July 24, 2012 | Tickers: DWA, DIS | 0 Comments

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Disney (NYSE: DIS) received a considerable amount of criticism following its $4.2 billion acquisition of Marvel Entertainment in 2009.  Although the purchase did grant the entertainment conglomerate access to a huge vault of some of the most famous characters in the comic book world, the acquisition was, well, expensive.  With 2012’s release of Marvel’s The Avengers, an immediate blockbuster hit that has brought in close to $1.5 billion worldwide at the box office, most of the naysayers have since changed their opinions on the acquisition.  With several more Marvel character-based films slated for release over the next several years, it is certain that Disney has only witnessed the tip of the iceberg when it comes to Marvel’s IP. 

With the growth in the number of avenues through which such a character library can generate cash for an entertainment corporation, it is no surprise that other studios are on the hunt of their own character treasure troves.  The week of July 23 brings the relatively under-the-radar news that DreamWorks Animation (NASDAQ: DWA) has won a $155 million bid war for Classic Media, the owner of more than 450 lovable classic characters including Casper the Friendly Ghost, Lassie, Fat Albert, Gumby, Richie Rich, Rockey & Bullwinkle, Where’s Waldo?, and the VeggieTales group. 

Any Significance?

For a $1.6 billion corporation, an acquisition of such small proportions has done little to spark a large jolt of excitement in DreamWorks’ stock in early week trading.  There may be much more reason for DreamWorks’ investors to be bullish on the purchase, however.

Founded by Steven Spielberg and current CEO (and ex-Disney executive) Jeffrey Katzenberg in the mid-1990s, DreamWorks Animation has launched 24 films since its first release in 1998.  Thus far, however, the studio has built much of its success on several key film franchises.  Other single (and less memorable) entries have filled in the gaps of DreamWorks’ library over the past several years – i.e. The Road to El Dorado, Sinbad: Legend of the Seven Seas, and Flushed Away, among others.

Biggest Successes (boxofficemojo.com)

• Shrek Series (includes Shrek, Shrek 2, Shrek the Third, Shrek Forever After, and Puss in Boots): Total production costs $655 million, worldwide box office $3.51 billion

• Madagascar Series (includes Madagascar, Madagascar: Escape 2 Africa, and Madagascar 3: Europe’s Most Wanted): Total production costs $370 million, worldwide box office $1.61 billion

• Kung Fu Panda Series (includes Kung Fu Panda and Kung Fu Panda 2): Total production costs $280 million, worldwide box office $1.30 billion

With excitement wearing down in the Shrek franchise, no upcoming plans for the Kung Fu Panda series, and a new entry for Madagascar not slated before 2015, these core profit centers are not expected to contribute a ton to DreamWorks’ top line over the next several years. 

The building out of Dreamworks’ library with tested and time-enduring characters and the huge positive effect that those characters are likely to have on the studio’s licensing efforts is likely to be the most lucrative outcome from the Classic Media acquisition.  New character development and testing is no cheap venture – the three previously mentioned mediocre releases collectively took more than $300 million and years of human labor to produce, with little more than break-even box office results to show for it. 

Future Potential

Much more revenue from the acquired Classic Media characters will hopefully come from lucrative licensing ventures than from future film releases.  Classic Media’s character vault generated more than $375 million in 2011 through licensing agreements alone, of which a percentage contributed to the firm’s $82.2 million in annual revenues and $19.2 million in operating profits.  

Similar to a Disney-like strategy, the large influx of IP hitting DreamWorks’ vaults should allow for a very attractive revenue funnel across multiple channels.  As shown with Disney’s Marvel acquisition, films are just the tip of the iceberg:

• Theme Park Integration: DreamWorks Animation recently announced plans to open an indoor theme park at the soon-to-be-completed American Dream Mall in the New Jersey Meadowlands.  The venture will be operated by Triple Five, which currently owns the West Edmonton Mall and the Mall of America.  Likewise, in the outskirts of New York City and adjacent to the MetLife Stadium (home of NY Jets and NY Giants), the entertainment center’s hotels, restaurants, movie theaters, indoor ski/snowboard parks, movie theaters, and other entertainment options are expected to draw 40-55 million visitors annually.  The agreement with Triple Five and the expansion of DreamWorks’ character vault could lead to licensing deals across Triple Five’s two other destination parks in the future.

• Consumer Channel: Despite the reduction in consumer retail spending over the past six months and the mixed bag in revenues coming from top toy makers including Mattel and Hasbro, character licensing for younger-aged consumers is still an astronomically large business.  One of the most exciting areas for the future of the DreamWorks/Classic Media team, as per the former’s CEO Katzenberg, is the swiftly growing digital products channel.  The acquisition, for instance, gives DreamWorks access to Classic Media’s huge Golden Books library, which has sold more than 2 billion books to children worldwide to date.  Without any of these 500,000+ titles yet to be released in the digital format, there is a large huge opportunity to reach a new generation of consumers through hot selling learning tools like the LeapFrog Leap Pad line of products.  The Leap Pad, as well as LeapFrog’s Leapster gaming system and the Tag reading system are expected to help the corporation generate an estimated $559 million in revenues next year, a meaningful 23% increase over the firm’s 2011 top line.  

Disney might be leaps and bounds above the competition with its extremely full integration of all of its key entertainment divisions, but that does not mean competitors like DreamWorks cannot set up their own attractive recurring revenue streams by integrating the output of its film studio through other product/service channels.  The acquisition of Classic Media represents the first step in attaining a more diverse revenue composition, as a marketable vault of classic characters is the most key initial requirement.  With the ability to speed up its movie output from the current rate of 2-3 per year, and with the rest of the implied mass of the iceberg that currently lies underneath the acquisition’s surface, there is plenty of reason for investors to take a closer look into DreamWorks Animation. 

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